SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission File No.: 01-13470
BIG SMITH BRANDS, INC.
(Name of small business issuer in its charter)
Delaware 13-3005371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 West Camino Real, Suite 402, Boca Raton, Florida 33433
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 367-8283
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Classes on Which Registered
- ---------------- -------------------
Common Stock, $.01 par value Pacific Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form 10-KSB, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $12,560,715.
As of March 31, 1998, Registrant had 7,099,842 shares of Common Stock
outstanding ($.01 par value). On that Date, the aggregate market value of the
Common Stock held by persons other than those who may be deemed affiliates of
Registrant was $5,610,926 (based on the average of the reported high and low
sales prices on Nasdaq's over-the-counter market on such date).
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
The Company is an apparel company which sells quality work apparel
("workwear") under its own brand names Big Smith, Smith Mountain Classics, Big
Smith Vintage, Big Smith Kids and, since May 1997, through the Big Smith
Sportswear line (as defined below). This focus reflects the Company's current
strategy of growing through Company-owned labels rather than through dependence
on licensed labels, as was the Company's strategy prior to the Caterpillar
Termination (as defined below). In addition, the Company manufactures and sells
workwear to mass merchandisers for sale under their private labels.
The Company believes that it can continue to increase its domestic and
international market share for these brands. The Company is one of the few
remaining made in the USA labels, which is particularly attractive to workwear
retailers in the American heartland.
The Company began to implement its expansion in the distribution of Big
Smith Sportswear by retaining John Bagdasian as the new Vice President and
General Manager of the Big Smith Sportswear division as of March 17, 1997. Mr.
Bagdasian has over 20 years of experience in the apparel industry. See
"--Employees" and "--Products."
Workwear has been produced in the United States under the Big Smith
label since 1916. The Company was organized in 1980 as a Delaware corporation,
and in 1985 acquired certain assets of Smith Brothers Manufacturing Company,
including the rights to the Big Smith and related trade names. The Company's
workwear product line is built around its flagship overalls, jeans and jackets,
all of which are made in the United States. The Company's workwear products
require relatively few changes in design and styling from year to year and, with
the exception of insulated products sold for the fall and winter retail season,
are generally sold throughout the year. The Company's workwear products are
generally sold at moderate prices through mass merchandisers, including
Wal-Mart, Sears and J.C. Penney, primarily in the American heartland.
The Company's new sportswear line is marketed under the existing Big
Smith label. The sportswear line differs significantly, however, from the
traditional products marketed under the Big Smith label primarily in design,
target sales market and higher margin sales. The designation "Big Smith
Sportswear" is used in this Annual Report on Form 10-KSB to distinguish the
sportswear line from the traditional workwear lines marketed under the Big Smith
label. The Company's sportswear product line is centered on fashion oriented top
and bottom apparel designed for purchase by the young adult market. The
sportswear products change from season to season following the dynamic nature of
the marketplace being services. The Big Smith Sportswear line is sold at
moderate prices relative to the market through chains such as Gadzooks in the
United States and Top Man Stores in the United Kingdom. In all, the
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Company's products, workwear and sportswear, are sold to approximately 830
customers who re-market the products through approximately 3,200 stores.
The Company experienced a significant decrease in revenues in 1997 as a
result of the purported termination effective in January 1997 by Caterpillar,
Inc. ("Caterpillar") of the Company's license to manufacture and sell workwear
under the Caterpillar label (the "Caterpillar Termination"). See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." and "Item 3. Legal Proceedings - Caterpillar Litigation." The
Company's export sales decreased to $0.15 million in 1997 from $4.61 million in
1996. In order to fund its cash needs, on April 2, 1997 the Company completed a
Regulation S placement of $1.7 million in principal amount of its 6% Convertible
Debentures (the "Debentures"). See "Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." By March 1998, all of the Debentures had been converted into common
stock.
At December 10, 1997, the Company secured a new revolving loan and
credit facility allowing for maximum availability of $10,000,000 based on a
specified percentage of eligible accounts receivable, inventories, real
property, equipment and trademarks. At December 31, 1997, the Company had
approximately $259,000 of unused availability under the Credit Facility. The
loan bears interest at prime rate plus 1.875% (10.375% at December 31, 1997) and
matures in December 2000. A portion of the proceeds under this facility were
used to pay off the previous revolving line-of-credit and other equipment and
working capital loans in an aggregate principal amount of approximately $4.1
million. The loan is secured by all of the assets of the Company.
Products
The Company's line of workwear currently includes overalls, coveralls,
quilted coats, industrial jeans, denim jeans and jackets, vests, aprons,
dungarees, shirts, tee shirts and caps, all for adults. The Company also
manufactures children's wear, including overalls, jeans, vests, jackets, tee
shirts and caps. Substantially all of the Company's branded products are
manufactured in the United States from American made fabrics typically employing
processes designed to produce sturdy, high-quality, long-lasting garments.
The production of workwear involves relatively few changes in design
and styling from year to year. The Company's fall and winter line differs from
its spring and summer line primarily in that the fall and winter products are
quilted and insulated while the spring and summer products are not. Items in
each line sell at retail in the $15 to $35 range except for coats and insulated
overalls, which sell at retail in the $50 to $75 range. The higher prices of the
insulated products in its fall and winter line have historically resulted in the
Company recognizing higher gross sales and higher margins during the second half
of its fiscal year.
The production of the Big Smith Sportswear line involves more design
and styling changes than the workwear line from year to year. These products
require fashion industry driven alterations from year to year. The higher cost
of production, however, is recovered in
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the higher margin sales of the Big Smith Sportswear line. Items in this line of
products sell at retail in the $30 to $55 range.
Warehousing and Distribution
Substantially all of the Company's products, whether manufactured by
the Company or by a contractor, are stored in the Company's finished goods
warehouses located in Carthage, Missouri and Miami, Oklahoma. All of the
Company's workwear is distributed from its finished goods warehouses.
All of the Company's domestic products are distributed by truck from
its warehouses. Substantially all deliveries to customers are made by common
carriers with whom the Company has long-standing relationships. The Company
either has contracts with these carriers or ships collect per customer-supplied
routing guides.
Competition
The apparel industry, including the workwear and sportswear markets, is
fragmented and highly competitive. The Company competes with a large number of
domestic and foreign manufacturers in all of its product markets. Some of the
Company's competitors have financial resources, sales organizations and
manufacturing capacity considerably larger than those of the Company.
Among its largest competitors in the workwear market are Carhartt
Corp., Williamson-Dickie Manufacturing Company, Inc., OshKosh B'Gosh, Inc., and
Walls Holding Corp. Competition is generally in terms of quality, price, service
and style. The Company's principal means of meeting competition are high-quality
workmanship and materials, a strong fundamental product offered at a moderate
price, maintaining what the Company believes is its reputation as one of the
most reliable suppliers in the market, a sales organization trained to assist
customers in merchandise planning and the prominence of its labels. The Company
has historically sought to adjust its product mix and markets to the demands of
its customers, rather than attempting to establish consumer trends or to design
in anticipation of short-term market fads.
In the sportswear market, the Company's largest competitors are
expected to be Tommy Hilfiger, Calvin Klein and other large internationally
known branded sportswear manufacturers. Competition in this market is intense.
The Company's principal means of meeting competition are through pricing and
design. Unlike the workwear market, the sportswear market requires more
attention to consumer trends. The Company's strategy for its new Big Smith
Sportswear line is to follow the lead of customer demand in design and styling
of its sportswear products, providing a solid, dependable sportswear product
while anticipating trends in design and styling.
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Manufacturing and Sourcing
The Company purchases raw materials, consisting mainly of piece goods
made from cotton, synthetics and blends of cotton and synthetics, from a number
of textile mills and converters. Thread, zippers, brass snaps and buttons,
labels, boxes and trim are purchased from a number of suppliers. No single
supplier of raw materials is critical to the Company's production needs, and the
Company believes that an ample number of alternative suppliers exists should the
Company need to secure additional or replacement raw materials. The Company has
no long-term contracts with any of its suppliers. Approximately 86% of the
Company's fabric requirements were obtained from four suppliers in fiscal year
1997. See "Item 12. Certain Relationships and Related Transactions." The Company
has experienced little difficulty in obtaining raw materials and believes that
the current and potential sources of fabric and trim supply are sufficient to
meet its needs for the foreseeable future.
The Company's manufacturing process consists of four principal
operations: the computer-aided design of cutting patterns to minimize fabric
waste, the cutting of the fabric, the sewing of cut fabric into complete
garments, and the affixing of brass snaps and fittings. After the Company
receives bolts of fabric, it performs substantially all pattern-cutting
operations at its own facilities. After the patterns are cut, the fabrics and
piece goods are manufactured and assembled at the Company's facilities or sent
to one of its contractors for manufacture and assembly. If permanent press or
pre-washing is required, the heat treating of the finished garment in a
permanent press curing oven or laundering is done by an unaffiliated contractor.
Quality-control personnel inspect work-in-progress and finished goods during the
production process and again upon receipt. Substantially all of the Company's
fabrics are inspected upon receipt in the Company's warehouse. Because the
Company's strategy is to build on its existing products, all of the apparel
manufactured or sourced by the Company is planned and designed through the
efforts of its in-house marketing personnel. The Company does not maintain an
in-house design team and contracts for more extensive outside design services
when necessary.
The Company from time to time will use outside contractors which
receive fabric from the Company and assemble garments to the Company's
specifications. Garments assembled by contractors accounted for approximately
20% of the Company's unit production in fiscal year 1997. The Company's design
and quality control personnel normally monitor the manufacturing processes at
the Company's contractors in order to ensure that they meet Company quality
standards. In addition, the Company's quality control program includes on-site
inspections of work-in-progress and finished goods during the production process
and inspection of finished goods upon receipt. Currently the Company experiences
a return rate for poor quality garments of less than 1%.
Wholesale Operations
Domestic
Most of the Company's products are marketed through various mass
merchandisers, the largest of which was Wal-Mart during 1997 and 1996. Sales to
Wal-Mart represented 45.6% of the Company's net sales in 1997 and 30.9% in 1996.
The Company's relationship with Wal-Mart has given it wide access to the U.S.
market and a stable source of
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sales. This increase reflected the cessation of sales of Caterpillar branded
products and the reduction in other private label sales as well as not an
increase in actual sales to Wal-Mart.
The Company is integrated into the program purchasing of mass
merchandisers, whereby it is informed at the beginning or just prior to the
beginning of each calendar year of the minimum purchases to be made by the
customer during that calendar year, and informed weekly of updated delivery
schedules and locations. This system permits the Company to anticipate over half
of its annual sales and plan and schedule production accordingly.
The Company's products are also marketed through a large number of
independent department stores, farm and fleet stores and buying collectives. The
Company estimates that its products were sold in approximately 3,200 stores and
4,200 stores in fiscal year 1997 and fiscal year 1996, respectively.
In 1997, the Company began to receive orders from significant new
customers, such as Mills Fleet & Farm Corp., Bass Pro Shop, Wet Seals Stores,
Gadzooks and Top Man Stores and significantly increased orders from existing
customers, such as Blain's Supply Corp. During 1997, the Company planned and
implemented the introduction of additional Company-owned branded lines to
replace Caterpillar branded products and established additional and stronger
relationships for sale of such products. The Company formally introduced its Big
Smith Sportswear line at the leading annual industry trade show in August 1997.
The sales of this new line are increasing. The Big Smith Sportswear line is
marketed at higher margins than much of the workwear under the Company-owned
labels, similar to the high margin Caterpillar branded products marketed by the
Company prior to the Caterpillar Termination. The current margin on the Big
Smith Sportswear line is between 20% and 35% bringing the overall average gross
margins of all sales to approximately 20%.
Receivables from Wal-Mart are typically paid in full between 45 and 60
days from purchase. Receivables from the Company's remaining domestic customers
are generally on thirty day terms. The average age of receivables of the
Company's domestic customers, at December 31, 1997 was 48.5 days, excluding KPR
receivables which were subject to litigation, as compared with an average age of
49.0 days at December 31, 1996. See "Item 3. Legal Proceedings--Other
Litigation."
Foreign
Approximately three years ago the Company began to implement a
corporate strategy designed to convert the Company from a workwear manufacturing
company exclusively based and operated in the United States to a multi-brand,
regionally conceived, designed and sourced global producer and marketer of both
workwear and sportswear.
Beginning in 1997, the Company began an intensified effort to establish
international markets for Company branded products including the Big Smith
Sportswear line through participation in international trade shows and meetings
with international distributors. To date the Company has established
distributorships for Big Smith branded products in the United Kingdom, France,
the Netherlands, Italy and Israel. As part of its overall strategy of
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focusing on Company-owned brands, the Company plans increased international
distribution of its product lines, primarily Big Smith Sportswear.
The Company also intends to license certain international rights to Big
Smith and related trademarks to other manufacturers of workwear and Sportswear.
The Company intends to utilize Big Smith Global Limited, its wholly owned
subsidiary under the laws of England and Wales, to supervise and administer the
design, manufacture, sales and marketing of all brands and labels owned by the
Company outside of the United States as the international market for such brands
and labels expands.
Retail Operations
Historically, the Company maintained retail outlets at each of four
manufacturing locations. When two of these manufacturing locations were closed,
the Company maintained the retail outlets in those locations. These four retail
outlets sell both first and second quality merchandise into the local
communities of which the Company is a part and had net sales of approximately
$706,000 for the year ended December 31, 1997 and net sales of approximately
$772,000 for the year ended December 31, 1996. In February 1998, the Company
opened a new retail store in the South Beach area of Miami, Florida. This new
store focuses primarily on the sale of first quality products in the Big Smith
Sportswear line. The Company currently has no plans for further expanding its
retail network.
Trademarks and Licenses
Since the Caterpillar Termination, the Company's branded products have
become the central focus of the Company's business strategy. In addition to the
Big Smith label, which has been used on workwear since 1916, the Company
produces goods under Smith Mountain Classics, Big Smith Vintage and Big Smith
Kids labels, as well as the Big Smith Sportswear line. In 1995, the Company
purchased the "Big Smith" trademark in the seven countries in Europe for which
the Company did not previously have trademark rights for an aggregate purchase
price of $500,000 payable over four years.
Employees
As of December 31, 1997, the Company employed approximately 233 people
on a full-time basis, including 23 employees in administration and accounting, 5
employees in marketing and sales, and 205 employees in manufacturing. The
Company also employed 11 part-time employees and 11 independent sales
representatives. Approximately 69% of its employees are paid on a piecework
basis and the balance are hourly-paid or salaried.
The Company has never experienced a material work stoppage or slowdown
due to labor disagreements. The Company believes that its relations with all
employees are satisfactory. None of the employees are covered by a collective
bargaining agreement. The manufacturing employees are non-unionized pieceworkers
with an approximate average tenure of five years. The Company provides a
benefits package to all of its full-time employees, including health insurance,
paid holidays and vacations.
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ITEM 2. DESCRIPTION OF PROPERTY.
Facilities
The Company owns or leases two clothing plants aggregating
approximately 184,000 square feet of floor space, including approximately
115,000 square feet of warehouse floor space. The Company's principal executive
office is located in Boca Raton, Florida. The following table sets forth certain
information concerning each of the Company's facilities.
Properties Owned
LOCATION FLOOR SPACE PRINCIPAL USES
(SQUARE FEET)
Carthage, Missouri 153,500 Manufacturing,
warehousing, retail,
administrative offices(a)
and distribution center
Properties Leased
LOCATION FLOOR SPACE LEASE PRINCIPAL
(SQUARE FEET) EXPIRES USES
Garnett, Kansas 1,100 7/31/98 (b) Retail
Monett, Missouri 3,700 9/23/98 (c) Retail
Miami, Oklahoma 30,000 8/31/98 (d) Manufacturing
(3 locations) 16,000 5/31/98 (e) Warehousing
3,000 1/31/98 (f) Retail
Boca Raton, Florida 1,839 9/1/2000 Office Space
Miami Beach, Florida 700 2/28/2003 Retail
(a) As of March 31, 1998, the Company has consolidated all of its
administrative offices in the Boca Raton, Florida location (pending
relocation of administrative personnel).
(b) The lease is renewable for two additional one-year terms at the Company's
option.
(c) Automatic annual renewal unless either party gives notice of termination
prior to such renewal.
(d) The lease is renewable for three additional one-year terms at the Company's
option.
(e) The lease is renewable for four additional one-year terms at the Company's
option.
(f) The Company is in the process of negotiating a new lease for this property.
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All of the Company's manufacturing facilities are of brick, block or
metal construction and have sprinklers throughout. The Company's retail, office
and other facilities all meet local building code requirements. All of the
Company's facilities have been well-maintained and are adequate for their
present uses.
The Company uses outside contractors for portions of its current
production. See "Description of Business--Manufacturing and Sourcing."
Depending on the demand for the Company's products, the Company may
acquire additional facilities or expand its existing facilities. However, the
nature, financing and timing of any acquisitions or expansion have not yet been
determined.
Substantially all of the machinery and equipment used by the Company in
its manufacturing operations is either owned or subject to lease purchase
arrangements. The Company's machinery and equipment is well-maintained and
adequate for its present uses.
ITEM 3. LEGAL PROCEEDINGS.
Caterpillar Litigation
On June 25, 1996, Big Smith Global Limited ("BSG") received a purported
notice of termination of the Company's license to use the Caterpillar brand. The
Company has vigorously litigated this matter which remains pending. The history
of the litigation with Caterpillar, Inc. is outlined in detail in the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997.
Other Litigation
The Company is involved in litigation with a number of its foreign
distributors in connection with their refusal to pay royalties the Company
believes to be due in respect of sales by such distributors of Caterpillar
branded products prior to the Company's ceasing to sell such products.
Additionally, certain distributors have made claims against the Company relating
to the effects of the purported termination of the Caterpillar license on their
arrangements with the Company. A summary of these actions follows.
On December 11, 1996, BSG filed suit in the UK High Court against The
Big Yellow Corporation Limited ("Big Yellow") seeking to collect unpaid
royalties of approximately 500,000 British pounds together with interest. Big
Yellow filed a counterclaim against BSG and the Company alleging quantifiable
damages of approximately 18.15 million British pounds and unqualifiable damages
for breach of contract, interest and indemnity in respect of potential claims by
Caterpillar. On April 3, 1997, BSG amended its Statement of Claim to include
allegations of damages for breach of contract against Big Yellow. The Company
has entered into a settlement with Big Yellow under which Big Yellow and the
Company have entered into mutual releases and Big Yellow has paid the Company
eight hundred thousand United States dollars (US$800,000).
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On March 20, 1997, the Company and BSG filed suit against All American
in the Commercial Court of Paris, France seeking recovery of approximately
$133,000 of accounts receivable it believed were due and owing. Since the suit
was commenced, All American has paid substantially all of the amount in
controversy.
On March 21, 1997 the Company filed suit against KPR Sports
International, Inc. ("KPR") in United States District Court for the Eastern
District of Pennsylvania, in connection with KPR's breach of contract in its
failure to pay the full agreed upon price relating to its purchase from the
Company of certain Caterpillar branded inventory. In November 1997, the Company
and KPR entered into a settlement agreement providing for six monthly
installment payments of $100,000 each beginning November 1, 1997. The final
payment of this settlement is due in April 1998.
The Company has engaged in discussions with Selected Brands Shoe
Company in seeking recovery of at least $73,000 of accounts receivable it
believes are due and owing and with Fashion Fever CC seeking recovery of an as
yet undetermined amount of royalties it believes are due and owing. These
discussions are preliminary to filing collections actions if the amounts due
from these parties are not settled in such discussions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Warrants were first quoted on the Nasdaq
Stock Market's Small-Cap Market ("Nasdaq") under the symbols BSBI and BSBIW on
April 19, 1995. On December 4, 1997 Nasdaq delisted the Company's securities due
to the Company's failure to meet Nasdaq's requirements for continued listing.
On April 19, 1995, the Company's securities began to be quoted on the
Pacific Exchange under the symbols BSM TT and BSM WS TT. The Pacific Exchange
notified the Company by letter dated December 5, 1997 that the Company's net
tangible assets had fallen below the Pacific Exchange's minimum requirement. On
March 3, 1998 the Equity Listing Committee of the Pacific Exchange met and
considered the Company's net tangible assets and share bid price deficiencies in
light of the plan of remediation submitted by the Company. The Equity Listing
Committee granted the Company a six-month extended compliance period within
which to remedy the Company's current non-compliance with the Pacific Exchange's
listing maintenance requirements for net tangible assets/net worth and share bid
price.
The Pacific Exchange's Equity Listing Committee will meet September 1,
1998 at which time the impact of the Company's plan of remediation will be
reviewed. There can be no assurance that the Company's net tangible assets/net
worth and share bid price will rise above the Pacific Exchange's minimum
requirement level by September 1, 1998, or that the Pacific Exchange will grant
a further extended compliance period to the Company. Delisting from the Pacific
Exchange could have a material adverse effect on the value of the Company's
securities.
The following table sets forth the high and low trading range prices
for the Common Stock and Warrants, as quoted on Nasdaq (through December 3, 1997
on Nasdaq, and thereafter on the over-the-counter bulletin board), for the
periods indicated. The quotes represent interdealer prices without retail
markup, markdown or commission, and may not necessarily represent actual
transactions. The trading volume of the Company's securities fluctuates and may
be limited during certain periods. As a result, the liquidity of an investment
in the Company's securities may be adversely affected.
<TABLE>
<CAPTION>
Common Stock Warrants(1)
Fiscal Year Ending December 31, 1996
<S> <C> <C> <C> <C>
Quarter ended March 31, 1996........................... 4 19/32 2 1/8 1 3/64 5/16
Quarter ended June 30, 1996............................ 3 1/8 2 9/16 1/8
Quarter ended September 30, 1996....................... 3 1/4 1 1/4 7/16 3/32
Quarter ended December 31, 1996........................ 3 1/8 2 1/8 9/32 1/8
Fiscal Year Ending December 31, 1997
Quarter ended March 31, 1997........................... 4 13/64 2 5/8 17/32 1/8
Quarter ended June 30, 1997............................ 4 5/16 29/64 3/32
Quarter ended September 30, 1997....................... 1 1/32 3/16 3/16 1/32
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Quarter ended December 31, 1997........................ 1 9/16 1/8 5/32 1/64
</TABLE>
(1) Each of the Warrants entitled the holder to purchase one share of Common
Stock, par value $.01 per share at an exercise price of $4.60 per share,
subject to certain adjustments. The Warrants expired by their terms on
February 8, 1998.
At December 31, 1997, the Company's Common Stock was held by 31 holders
of record and approximately 530 beneficial holders. The Company's Warrants were
held by 18 holders of record. At March 31, 1998, the high and low bid prices for
the Company's Common Stock on the over-the-counter bulletin board were $1.25 and
$0.95.
On April 2, 1997, the Company closed an offshore placement of
$1,700,000 of its 6% Convertible Preferred Debentures due March 31, 2000
("Debentures"). By March 1998, the Debentures had been converted to 3,169,842
shares of the Company's Common Stock. As a result, the Company no longer has
outstanding any convertible debentures.
Dividends
The Company intends to retain any future earnings that may be generated
from operations to help finance the operations and expansion of the Company and
accordingly does not plan to pay cash dividends to holders of the Common Stock
during the reasonably foreseeable future. Any decisions as to the future payment
of dividends will depend on the earnings and financial position of the Company
and such other factors as the Company's Board of Directors deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The discussion and analysis set forth below is for the years ended
December 31, 1997 and December 31, 1996. It should be read in conjunction with
the Financial Statements of the Company and the related Notes thereto appearing
elsewhere in this Form 10-KSB.
The Company's viability as a going concern is dependent upon its
ability to raise sufficient working capital and to meet any liquidity needs that
may exceed the availability under the Credit Facility (as defined below). The
Company experienced a loss from operations in 1997 and 1996 and had a working
capital deficiency of $(1.5) million at December 31, 1997. Also, the Company's
liquidity needs could exceed the amount of borrowings available under the Credit
Facility. The Company has commenced several steps to obtain additional sources
of liquidity including bridge financing arrangements and the sale of additional
common stock.
The Company has begun negotiations with an underwriter for a public
offering (the "Potential Placement") of the Company's authorized but unissued
Common Stock pursuant to a prospectus during 1998. In conjunction with the
Potential Placement, the Company has
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authorized Goodbody International, Inc. to seek bridge financing through the
sale of approximately $2 million of subordinated debentures to be repaid from
the proceeds of the Potential Placement. There can be no assurance, however,
that the Potential Placement will be achieved or that bridge financing can be
obtained.
The Company's line of credit with Mercantile Business Credit Inc.
("MBCI") expired on June 30, 1997 and the Company operated under a series of
standstill agreements with MBCI (the "Standstill Agreements") from that date
until it closed on the Credit Facility on December 10, 1997. See "--Liquidity
and Capital Resources."
At December 10, 1997, the Company secured a new revolving loan and
credit facility (the "Credit Facility") with NationsCredit Commercial Funding, a
NationsBank Company ("NationsCredit") allowing for maximum availability of
$10,000,000 based on a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks. At December 31, 1997, the
Company had approximately $259,000 of unused availability under the Credit
Facility. The amount outstanding under the Credit Facility as of December 31,
1997 was $3,698,928 million. See "--Liquidity and Capital Resources."
The Company's new Big Smith Sportswear line differs significantly from
its traditional products primarily in design, target sales market and higher
margin sales. The Company's sportswear product line is centered on fashion
oriented top and bottom apparel designed for purchase by the young adult market.
The sportswear products change from season to season following the dynamic
nature of the marketplace being services. The Big Smith Sportswear line is sold
at moderate prices relative to the market through chains such as Gadzooks in the
United States and Top Man Stores in the United Kingdom at higher margins than
much of the workwear under the Company-owned labels.
Sales to Wal-Mart of the Company's workwear products marketed under
Company owned brands represented 45.6% of the Company's net sales in 1997. As
sales of the Big Smith Sportswear line increase, the Company believes that the
percentage of its net sales represented by sales to Wal-Mart will decrease.
The Company believes that its business is seasonal and has historically
experienced and expects to continue to experience lower revenues and net income
in the first half of each fiscal year (primarily January through April) as
compared to the second half of its fiscal year. The seasonality is due in part
to the general decrease in sales in the apparel industry following the Christmas
season as well as the increase in sales of the Company's winter weight garments,
which sell at higher prices, and back-to-school clothes during the months of
August through November. In addition, the Company's quarterly results may
fluctuate depending upon, among other things, the timing of delivery of large
orders and the introduction of new product lines or additional labels. See
"--Seasonality."
The following discussion and analysis should be read in conjunction
with the Company's financial statements appearing elsewhere in this report.
12
<PAGE>
Results of Operation
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net sales, excluding net royalties, for the year ended December 31,
1997 decreased by $9.24 million, or 42.4%, to $12.56 million from $21.80 million
for the year ended December 31, 1996. Net sales for fiscal year 1997 for
Caterpillar branded products, Big Smith and other branded products, and private
label products were $80,000, $10.56 million and $1.20 million, respectively, as
compared to $8.21 million, $11.26 million and $2.33 million, respectively, for
fiscal year 1996. The decrease in sales of Caterpillar branded products,
resulted from the decision of the Company to cease sales of Caterpillar branded
products due to the purported termination of the Company's license by
Caterpillar. See "Item 3. Legal Proceedings--Caterpillar Litigation." The
decrease in Big Smith and other branded products resulted from decrease in sales
of overalls to Wal-Mart and a decrease in shirt sales primarily related to the
discontinuance of the Company's flannel shirt line. The decrease in private
label sales reflects the Company's strategic decision in 1996 to phase out
certain low margin private label programs for the K-Mart Corporation. Net
royalties from distributors for the manufacture and sale of goods under the
Caterpillar labels abroad for the year ended December 31, 1997 decreased to $0
as compared with net royalties for the year ended December 31, 1996 of $1.30
million. The Company discontinued such manufacture and sales during 1997 after
the Caterpillar Termination. See "Item 1. "Description of Business -- General"
and "Item 3. Legal Proceedings--Caterpillar Litigation."
Gross profit, excluding that from net royalties for the year ended
December 31, 1997 was $1.41 million, or 11.2% of net trade sales, compared to
$1.96 million, or 9% of net trade sales, for the year ended December 31, 1996.
The increase in the gross profit percentage was primarily due to non-recurring
writedowns during the three month period ended December 31, 1996 of $814,000 of
Caterpillar branded inventory, decreased sales of low margin private label sales
due to the discontinued private label programs for the Kmart Corporation and the
loss of higher margin sales of Caterpillar branded products, which were
partially offset by the decrease in Big Smith and other branded products .
Including gross profit from net royalties in the year ended December 31, 1996,
gross profit decreased by $1.85 for the year ended December 31, 1997 from $3.26
million for the year ended December 31, 1996.
Selling expenses decreased by $0.46 million to $1.48 million, or 11.8%
of net trade sales, for the year ended December 31, 1997, from $1.94 million, or
8.9% of net trade sales, for the year ended December 31, 1996. The decrease in
selling expenses resulted principally from a decrease of $488,000 in royalty
expense resulting from the cessation of domestic sales of Caterpillar branded
products, a decrease of $148,000 in advertising and trade show expense, a
decrease of $67,000 in sample expense, a decrease of $72,000 in shipping expense
and a decrease of $63,000 in sales commission resulting from the decrease in
trade sales, which were only partially offset by the increase in selling
expenses of $450,000 related to the launch of the new Big Smith Sportswear line.
General and administrative expenses decreased by $80,000 to $2.36
million, or 18.8% of net trade sales for the year ended December 31, 1997, from
$2.43 million, or 11.1%
13
<PAGE>
of net trade sales, for the year ended December 31, 1996. The decrease in
general and administrative expense was primarily due to a decrease of payroll
and related expenses of $284,000 and decreases in other administrative costs
related to downsizing and restructuring, which were only partially offset by an
increase in loan fees of $89,000 and an increase in consulting fees of $200,000,
primarily related to retention of a consultant to analyze and advise the Company
on how to cut costs including selling and general and administrative costs. The
Company began to implement the consultant's recommendations during the last four
months of the year ended December 31, 1997 and expects to realize continued
savings as a result of such recommendations.
During the year ended December 31, 1997 and December 31, 1996, the
Company accrued or incurred an aggregate of $1.01 million and $1.71 million,
respectively, of restructuring and litigation costs in connection with the
Caterpillar Termination, which included costs such as legal and professional
fees, impairment write-downs, plant shutdown costs, employee termination costs,
costs related to foreign operations and other related costs. See "Item 3. Legal
Proceedings."
The Company's bad debt expense increased by $101,559 to $205,440 for
the year ended December 31, 1997 from $103,881 in for the year ended December
31, 1996 primarily due to the writeoff of certain foreign receivables related to
the sale of Caterpillar products. See "Item 3. Legal Proceedings--Other
Litigation."
The Company's depreciation expense increased by $65,269 to $271,024 for
the year ended December 31, 1997 from $205,755 for the year ended December 31,
1996 primarily due to the acquisition of a new computer system purchased in 1996
and placed in service January 1, 1997.
The Company's interest expense for the year ended December 31, 1997
decreased by $116,000 to $644,000, or 5.1% of net trade sales, from $760,000, or
3.5% of net trade sales, for the year ended December 31, 1996. This decrease
resulted primarily from the decrease in borrowings under the Standstill
Agreements and an overall decrease in borrowing during the year ended December
31, 1997.
As a result of the foregoing, the Company's net loss for the year ended
December 31, 1997 increased to $4,626,423 from $3,944,810 for the year ended
December 31, 1996.
Liquidity and Capital Resources
The Company's viability as a going concern is dependent upon its
ability to raise sufficient working capital and to meet any liquidity needs that
may exceed the availability under the Credit Facility (as defined below). The
Company experienced a loss from operations in 1997 and 1996 and had a working
capital deficiency of $(1.5) million at December 31, 1997. Also, the Company's
liquidity needs could exceed the amount of borrowings available under the Credit
Facility. The Company has commenced several steps to obtain additional sources
of liquidity including bridge financing arrangements and the sale of additional
common stock.
14
<PAGE>
The Company has begun negotiations with an underwriter for a public
offering (the "Potential Placement") of the Company's authorized but unissued
Common Stock pursuant to a prospectus during 1998. In conjunction with the
Potential Placement, the Company has authorized Goodbody International, Inc. to
seek bridge financing through the sale of approximately $2 million of
subordinated debentures to be repaid from the proceeds of the Potential
Placement. There can be no assurance, however, that the Potential Placement will
be achieved or that bridge financing can be obtained.
On April 2, 1997, the Company closed an offshore placement of
$1,700,000 of its 6% Convertible Preferred Debentures due March 31, 2000
("Debentures"). By March 1998, the Debentures had been converted to 3,169,842
shares of the Company's Common Stock. As a result, the Company no longer has
outstanding any convertible securities or debentures.
At December 31, 1997 and 1996, working capital was approximately $(1.5)
million and $0.7 million, respectively. This decrease resulted primarily from
the loss of revenue due to the Caterpillar Termination. Working capital also may
vary from time to time as a result of seasonal inventory requirements, the level
of trade credit available and the level of accounts receivable balances.
At December 10, 1997, the Company secured a new revolving loan and
Credit Facility with NationsCredit allowing for maximum availability of
$10,000,000 based upon a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks. At December 31, 1997, the
Company had approximately $259,000 of unused availability under the Credit
Facility. The amount outstanding under the Credit Facility as of December 31,
1997 was $3,698,928 million. The Credit Facility bears interest at prime plus
1.875% (10.375% at December 31, 1997).
The Credit Facility also provides for additional interest under certain
circumstances and other fixed fees payable at closing and annually during the
term of the loan. A portion of the proceeds under the Credit Facility were used
to pay off the previous revolving line-of-credit and other equipment and working
capital loans in an aggregate principal amount of approximately $4.1 million.
The loan is secured by all of the assets of the Company including the accounts
receivable, inventories, property and equipment and trademarks.
The Company's $9 million line of credit with Mercantile Business Credit
Inc. ("MBCI") expired on June 30, 1997 and the Company operated from that date
under a series of standstill agreements with MBCI (the "Standstill Agreements"),
which provided financing in the interim period following the maturation of the
Company's principal line of credit until it closed on the Credit Facility on
December 10, 1997.
In 1997, the Company financed its operations primarily with borrowings
under its line of credit with MBCI and, after the consummation of its Credit
Facility with NationsCredit on December 10, 1997, with borrowings under the
Credit Facility. Cash used in operating activities totaled $0.8 million for the
year ended December 31, 1997 as compared with cash provided by operating
activities of $3.7 million for the year ended December 31, 1996. This change
reflected primarily decreases in receivables and inventory resulting from
15
<PAGE>
continuing effects of the Caterpillar Termination, especially reductions in
revenues and gross margins over the past year. The Company typically experiences
negative cash flow from operations during the first half of each year due to the
build-up of inventory in preparation for increased sales volume in the second
half of each year. See "--Seasonality."
Capital Expenditures
Capital expenditures totaled $65,561 for the twelve months ending
December 31, 1997. These expenditures consisted primarily of the purchase of
manufacturing machinery and equipment.
Intangible Assets
In 1995, the Company purchased the "Big Smith" trademark in the seven
countries in Europe for which the Company did not previously have trademark
rights for an aggregate purchase price of $500,000 payable over four years.
Seasonality
The Company's sales are generally higher in the last six months of the
year as compared to the first six months of the year both in terms of revenues
generated and, to a lesser extent, total garments sold. This seasonality is due
to an increase in sales of winter weight garments, which sell at higher prices,
combined with continued sales of regular weight garments. This seasonality has a
significant impact on the cash flow of the Company because the Company's
inventory levels tend to increase during the summer months in preparation for
anticipated higher sales levels in September, October and November.
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements and notes related thereto, beginning on
page F-1, included elsewhere in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
A change in the Company's independent accountants to Daskal, Bolton &
Manela, CPA, of Boca Raton, Florida, was reported on Current Reports on Forms
8-K filed with the Securities and Exchange Commission on January 26, 1998 (as
amended January 28, 1998) and February 11, 1998.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.
Directors and Executive Officers
The directors and executive officers of the Company are:
Year First Elected
Name Age Director Office
S. Peter Lebowitz 66 1985 Chief Executive Officer,
President and Director
Terry L. Dober 41 N/A Chief Financial Officer,
Vice President for Finance
John Bagdasian 49 N/A Vice President
Glen Freeman 68 1994 Director
Theodore L. Listerman 74 1995 Director
Julian H. Shaps 72 1994 Director
Jack Schultz 61 1994 Director
Howard Kaplan 50 N/A Secretary
S. Peter Lebowitz has served as Chief Executive Officer and President
of the Company since 1980. Mr. Lebowitz has been employed full time in the men's
apparel industry for over 40 years beginning in 1954 when he joined Hochschild,
Kohn & Co., Baltimore, Maryland. Thereafter, he served as a salesman in the
Menswear Divisions at The Van Heusen Company and as Vice-President of Big Yank
Corporation and Anvil Brands, Inc. From 1971 to 1979, he was Chairman and Chief
Executive Officer of Smith Brothers Manufacturing Company, Carthage, Missouri,
then the corporate owner of the Big Smith label. In 1980, he founded the
Company, and in 1985, the Company acquired certain assets of Smith Brothers
Manufacturing Company, including the ownership of the Big Smith label.
Terry L. Dober joined the Company in January 1994 as Chief Financial
Officer. He was appointed Vice President for Finance in November, 1995. As such,
he is responsible for all financial reporting, accounting, internal auditing and
related administrative functions.
17
<PAGE>
Mr. Dober, a Certified Public Accountant, received a Bachelor's Degree in
Business Administration/Accounting from Monmouth College of Monmouth, Illinois
in 1979. Mr. Dober has held increasingly responsible financial, administrative,
accounting and management positions in a variety of business environments. From
November 1989 until December 1993 he served as Controller of Miracle Recreation
Equipment Co. From July 1984 to November 1989, Mr. Dober was Accounting Manager
for Electrovert Companies.
John Bagdasian joined the Company in March 1997 as Vice President and
General Manager of the Big Smith Sportswear division. Mr. Bagdasian has over 20
years of experience in the apparel industry. From 1996 to 1997, he was Sales
Manager for Seattle Pacific Industries in the Union Bay division. From 1990 to
1996, he was President of Marketing for CAS, Inc./ Maneuvers. From 1983 to 1990,
he was Sales Manager for Bugle Boy Industries.
Glen Freeman was elected a director of the Company in September 1994.
Mr. Freeman served as General Manager of the Company after its acquisition of
certain assets of Smith Brothers Manufacturing Company in 1985 until 1994. Mr.
Freeman served as Vice-President of Merchandising of Smith Brothers
Manufacturing Company from 1969, when it acquired Continental Manufacturing
Company, to 1985. From 1945 to 1969, Mr. Freeman was employed by Continental
Manufacturing Company. Mr. Freeman has been employed in the workwear industry
for 49 years.
Theodore L. Listerman was elected a Director of the Company in January
1995. Mr. Listerman was involved in various aspects of the apparel business for
approximately thirty years. Mr. Listerman served in numerous senior management
positions at a number of major manufacturers and marketers of men's apparel
products. At present Mr. Listerman is a doctoral candidate at the University of
Missouri.
Julian Shaps was elected a Director of the Company in February 1994.
Mr. Shaps retired from full time participation in business in October 1990
following a career that spanned forty years in the sales and merchandising
segment of the apparel industry. Mr. Shaps' previous positions include
twenty-five years in various senior management positions at Salant, Inc., and
approximately fifteen years as Vice President of Sales and Merchandising at M.
Fine & Sons, Inc.
Jack Schultz was elected a director of the Company in February 1994.
Since 1993, Mr. Schultz has served as an active consultant to the retail
industry dealing with assignments that cover a broad range of issues and
entities involving virtually all major segments of the retail industry. Prior to
his full time entry into the consulting business, Mr. Schultz served from 1991
to 1993 as the President of the National Retail Federation, a leading retail
industry trade association.
Howard Kaplan was elected Secretary of the Company in August 1994.
Since 1991, Mr. Kaplan has served as President of Fabric Resources Corporation,
a denim jobber, and from 1988 to 1991, he served as Purchasing Agent for the
Company. Mr. Kaplan is not currently an employee of the Company.
18
<PAGE>
All directors hold office until the next annual meeting of the
stockholders of the Company and until their successors have been duly elected
and qualified, or until their earlier death, resignation or removal. The
Company's outside directors devote such time as is necessary and customary to
attend meetings of the Board of Directors and committees of the Board of
Directors and otherwise to perform their duties as directors.
The Company's officers are elected annually by, and serve at the
pleasure of, the Board of Directors, subject to the terms of any employment
agreements. Mr. Lebowitz has an employment agreement with the Company. See
"Executive Compensation-Employment Arrangements." No familial relationships
exist between any directors or officers of the Company.
Committees
The Company's Board of Directors has an Internal Audit Committee and an
Executive Compensation Committee. Messrs. Glen Freeman and Theodore Listerman
serve on the Internal Audit Committee and Messrs. Theodore Listerman, Jack
Schultz and Julian Shaps serve on the Executive Compensation Committee. The
principal financial personnel to review the results of the annual audit, the
Internal Audit Committee also reviews the scope of the annual audit and other
services before they are undertaken by the Company's auditors and reviews the
adequacy and effectiveness of the Company's internal accounting controls. The
Executive Compensation Committee administers the Company's 1994 Stock Incentive
Plan (the "1994 Plan") and makes recommendations to the full Board concerning
compensation, including incentive arrangements, for the Company's officers and
employees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Reporting
persons are required by Commission regulations to furnish the Company with
Copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company, the following persons failed to file, on
a timely basis, reports required by Section 16(a) of the Exchange Act, for the
number of transactions indicated, during fiscal year 1997.
Messrs. Freeman, Listerman, Schultz and Shap each failed to file on a
timely basis an Annual Statement of Beneficial Ownership of Securities on Form 5
with regard to the year ended December 31, 1997 in connection with 20,000
options granted to each of them during such fiscal year. See "Item 10. Executive
Compensation -- Compensation of Directors."] Mr. Bagdasian failed to file on a
timely basis an Initial Statement of Beneficial Ownership of
19
<PAGE>
Securities on Form 3 in connection with his appointment as Vice President and
General Manager of the Big Smith Sportswear division as of March 17, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table. The following table sets forth information
concerning the compensation for services in all capacities for the fiscal years
ended December 31, 1997, December 31, 1996 and December 31, 1995, of the Chief
Executive Officer of the Company and John Bagdasian, Vice President and General
Manager of the Big Smith Sportswear line, the only other executive officer of
the Company who earned over $100,000 during such fiscal years.
<TABLE>
<CAPTION>
============================================================================================================================
Annual Compensation Long Term Compensation
- ----------------------------------------------------------------------------------------------------------------------------
Other Annual Awards All Other
Name and Fiscal Salary Bonus Compensation Options Compensation
Principal Position Year ($) ($) ($) (1) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S. Peter Lebowitz-Chief 1997 $300,000 - $ 10,996 - -
Executive Officer 1996 $300,000 - $ 9,973 - -
1995 $250,000 - $ 8,700 175,000 (2) -
John Bagdasian 1997 $110,000 - - 10,000(3) -
============================================================================================================================
</TABLE>
(1) Represents the valuation of certain club membership dues and
automobile lease payments of approximately $10,996, $9,973 and $8,700 for 1997,
1996 and 1995, respectively.
(2) Represents grants of options in connection with the Company's
initial public offering, the vesting of which was contingent upon the Company
achieving a certain level of net income during the fiscal year ended December
31, 1995, which level was not achieved.
(3) Represents options granted in 1997.
Employment Arrangements
On January 1, 1996, the Company entered into a three year employment
agreement (the "1996 Agreement") with S. Peter Lebowitz pursuant to which he
agreed to serve as the Company's President and Chief Executive Officer through
December 31, 1998, at an annual compensation of $300,000 and an annual bonus of
up to $200,000 if the Company achieves a certain specified levels of net income.
Such levels were not achieved in 1997 or 1996. The employment agreement with Mr.
Lebowitz further provided that if his employment were terminated by the Company
without cause or at any time following a change of control, or by Mr. Lebowitz
within twelve months after a change of control, the Company would pay to Mr.
Lebowitz salary, bonus and benefits in the amount and kind then in effect
subject to
20
<PAGE>
certain adjustments for three years following such termination. The payment of
the salary and bonus would be made in a lump sum 30 days after the date of such
termination.
In addition, in 1994, Mr. Lebowitz was granted (i) options to purchase
up to 100,000 shares of common stock, portions of which would have vested had
the Company achieved certain specified levels of net income for fiscal year 1995
and/or fiscal year 1996 which levels of income were not achieved. In 1995, Mr.
Lebowitz was granted options to purchase up to 125,000 shares of Common Stock
that would have vested had the Company achieved a certain specified level of net
income for fiscal year 1996 which levels of income were not achieved.
On February 11, 1998, the Board of Directors of the Company approved
the amendment and restatement of S. Peter Lebowitz's employment contract to
extend the term to December 31, 2003. All other terms are substantially the same
as the 1996 Agreement. Also on February 11, 1998, the Board of Directors granted
options to Mr. Lebowitz for the purchase of 1,000,000 shares of Common Stock
pursuant to the terms and conditions of the Company's 1994 Plan, subject to
stockholder approval to the extent the grant exceeds available shares under the
1994 Plan. The options are exercisable at the market price on the date of grant.
Compensation of Directors
Non-employee directors of the Company will receive one thousand dollars
plus expenses for each meeting of the board that they attend and are granted
10,000 options annually. On August 26, 1996, each Director was granted an option
under the Company's 1994 Stock Incentive Plan (the "1994 Plan") to purchase
15,000 shares of the Company's common stock at an exercise price of $4.00 per
share. Following authorization by the shareholders at the 1997 Annual Meeting of
Stockholders of additional options under the 1994 Plan, each director was
granted an option to purchase an additional 10,000 shares at an exercise price
of $1.00 per share, which grant had an effective date of August 26, 1996. On
June 12, 1997, each Director was granted an option to purchase 20,000 shares of
the Company's common stock at an exercise price of $0.42. Each grant vests in
four substantially equal parts on each of the first four anniversaries of the
date of the grant. To the extent the options are unexercised, they expire on the
fifth anniversary of the date of the grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1998, the number of
shares of Common Stock beneficially owned (and the percentage of the Company's
Common Stock) by (i) each person known (based solely on Schedules 13D or 13G
filed) to the Company to be the beneficial owner of more than 5% of the Common
Stock, (ii) each director of the Company, (iii) the Named Executive and (iv) all
directors and executive officers of the Company as a group (based upon
information furnished by such persons). Under the rules of the Commission, a
person is deemed to be a beneficial owner of a security if such person has or
shares the power to vote or direct the voting of such security or the power to
dispose of or to direct the disposition of such security. In general, a person
is also deemed to be a beneficial owner of any
21
<PAGE>
securities of which that person has the right to acquire beneficial ownership
within 60 days. Accordingly, more than one person may be deemed to be a
beneficial owner of the same securities.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage (%) of
Beneficially Owned Common Stock
<S> <C> <C>
S. Peter Lebowitz 1,509,000 21.3%
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Theresa Lebowitz and Michael S. 474,000 6.7%
Nelson, Esq., as trustees (1)
c/o Kramer, Levin, Naftalis, Nessen
& Frankel
919 Third Avenue
New York, New York 10022
Glen Freeman (2) 12,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Theodore Listerman (2) 22,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Jack Schultz (2) (3) 14,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Julian Shaps (2) 12,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
John Bagdasian (4) 8,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
All directors and officers as a group 1,577,000 22.0%
(6 persons) (5)
</TABLE>
22
<PAGE>
- -----------------
* Indicates beneficial ownership of less than one (1%) percent.
(1) Represents shares held in trust for the benefit of Barbara Lynn Van Achte,
Karen Sue Hart and Wendy Ann Lebowitz, with respect to which Mrs. Lebowitz
and Mr. Nelson, a partner at the law firm of Kramer, Levin, Naftalis &
Frankel, the Company's outside corporate counsel, serve as trustees. Under
the Trust Agreement, Mrs. Lebowitz and Mr. Nelson share voting and
dispositive power, subject only to the beneficiaries' right to withdraw the
shares under certain circumstances. Mrs. Lebowitz is the wife, and the
three trust beneficiaries are the daughters, of Mr. Lebowitz.
(2) Includes 12,500 shares issuable upon exercise of options exercisable within
60 days.
(3) Includes 2,000 shares issuable upon exercise of warrants exercisable within
60 days.
(4) Includes 2,500 shares issuable upon exercise of options exercisable within
60 days.
(5) Includes options and warrants to purchase 54,500 shares exercisable within
60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company purchases some of its raw materials from a corporation
whose President is the Secretary of the Company. Such purchases for the years
ended December 31, 1997 and 1996 were $224,916 and $90,847, respectively.
Accounts payable to this related party totaled $1,269 and $0 at December 31,
1997 and 1996, respectively. Accounts receivable from this related party totaled
$0 and $0 at December 31, 1997 and 1996, respectively.
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT TABLE
Exhibit
No. Description
---- -----------
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
10(c) Loan and Security Agreement, dated December __, 1997, between the
Company and National Credit Commercial Funding, Inc., a
NationsBank Company.***
(z) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997.**
(ac) Letter of Intent, dated February 10, 1998, from D.L. Cromwell
Investments, Inc. ("Cromwell") to Willora Company Limited
("Willora") with respect to the conversion of the remaining
Debentures
(ad) Letter Agreement, dated February 10, 1998, among the Company,
Willora and Cromwell, with respect to the conversion of the
remaining Debentures.
27 Financial Data Schedule***
- --------------------------
* Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2 (No. 33-85302), as
amended, declared effective on February 8, 1995 ("Form SB-2").
** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, filed on April 15, 1997.
*** Filed herewith.
(b) Reports on Form 8-K.
None.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 13, 1998 BIG SMITH BRANDS, INC.
By: /s/ S. Peter Lebowitz
---------------------
S. Peter Lebowitz
Chairman of the Board,
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ S. Peter Lebowitz Chairman of the Board, President April 13, 1998
- ---------------------------- and Chief Executive Officer
S. Peter Lebowitz (Principal Executive Officer)
/s/ Terry L. Dober Chief Financial Officer April 13, 1998
- ---------------------------- (Principal Accounting Officer)
Terry L. Dober
/s/ Glen Freeman Director April 13, 1998
- ----------------------------
Glen Freeman
/s/ Julian H. Shaps Director April 13, 1998
- ----------------------------
Julian H. Shaps
/s/ Theodore L. Listerman Director April 13, 1998
- ----------------------------
Theodore L. Listerman
/s/ Jack Schultz Director April 13, 1998
- ----------------------------
Jack Schultz
</TABLE>
25
<PAGE>
Big Smith Brands, Inc.
Reports of Independent Accountants
December 31, 1997 and 1996
<PAGE>
BIG SMITH BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountant........................................................ F-2
Report of Independent Accountant........................................................ F-3
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996............................ F-4
Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996.... F-6
Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the Years
Ended December 31, 1997 and 1996......................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996.... F-8
Notes to Consolidated Financial Statements .............................................. F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Big Smith Brands, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of Big Smith Brands,
Inc., and Subsidiary as of December 31, 1997, and the related consolidated
statement of operations, changes in stockholders' (deficit) equity and cash
flows for the year ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Big Smith Brands,
Inc., and Subsidiary as of December 31, 1997, and the results of its operations
and its cash flows for the year ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have ben prepared assuming
the Company will continue as a going concern. As discussed in Notes 1 and 13,
the Company experienced a loss from operations in 1997 and 1996 and had a
working capital deficiency at December 31, 1997. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters includes obtaining bridge financing and
completing an equity offering, as described in Note 14. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Boca Raton, Florida
March 6, 1998
F-2
<PAGE>
To the Board of Directors and Stockholders of
Big Smith Brands, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of BIG
SMITH BRANDS, INC. AND SUBSIDIARY as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BIG SMITH
BRANDS, INC. AND SUBSIDIARY as of December 31, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company's primary lending
arrangement does not currently extend beyond June 30, 1997, and the Company's
liquidity needs prior to that date could exceed the amount of borrowings
available under the existing agreement. This raises substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BAIRD, KURTZ & DOBSON
Joplin, Missouri
February 26, 1997
F-3
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash $ 111,190 $ 170,551
Temporary investments (Note 10) 7,762 144,906
Accounts receivable, less allowance for doubtful
accounts; 1997 - $253,768, 1996 - $326,144 (Note 1) 2,004,176 3,150,830
Royalties receivable (Note 7) - 1,195,803
Inventories (Notes 1,2,7) 3,265,983 4,144,764
Prepaid expenses 147,985 151,978
------------- -------------
Total Current Assets 5,537,096 8,958,832
------------ ------------
Property and Equipment, at cost (Notes 1, 7):
Land 20,000 20,000
Buildings 497,978 471,109
Equipment 1,940,252 1,936,848
Vehicles 81,511 81,511
-------------- --------------
2,539,741 2,509,468
Less: accumulated depreciation 1,361,754 1,098,311
------------ ------------
Net property and equipment 1,177,987 1,411,157
------------ ------------
Other Assets:
Trademarks, less accumulated amortization;
1997 - $34,391, 1996 - $48,720 (Note 1) 432,749 467,140
Security deposits 26,139 12,130
Deferred finance charges, less accumulated
amortization of $69,949 (Note 1) 352,504 -
------------ ----------------
Total other assets 811,392 479,270
------------ ------------
Total Assets $ 7,526,475 $10,849,259
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Revolving line-of-credit (Note 3) $ 2,595,088 $3,633,177
Current maturities of long-term debt (Note 4) 429,609 579,991
Checks outstanding in excess of bank balance 277,284 284,552
Accounts payable 2,266,548 1,985,318
Accrued expenses 506,602 409,780
Accrued restructuring/litigation (Note 13) 330,863 651,302
Accrued royalties (Note 7) 665,674 665,674
----------- -------------
Total Current Liabilities 7,071,668 8,209,794
------------ ------------
Long-Term Debt (Note 4) 2,160,486 587,221
------------ -------------
Commitments and Contingencies (Notes 5 & 11) - -
Stockholders' (Deficit) Equity (Note 4):
Common stock, $.01 par value; authorized
10,000 shares; issued and outstanding
1997 - 4,198,842, and 1996 - 3,930,000 shares 41,998 39,300
Additional paid-in capital 7,181,620 6,315,818
Accumulated deficit (8,929,297) (4,302,874)
----------- -----------
Total Stockholders' (Deficit) Equity (1,705,679) 2,052,244
----------- ------------
Total Liabilities and Stockholders' (Deficit) Equity$ 7,526,475 $10,849,259
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Revenues: (Notes 1, 7)
<S> <C> <C>
Net sales $ 12,560,715 $ 21,804,928
Royalties, net of related costs of $937,546 in 1996 - 1,298,217
-----------------------------
Total revenues 12,560,715 23,103,145
Cost of goods sold 11,155,030 19,840,931
------------ ------------
Gross profit 1,405,685 3,262,214
------------- -------------
Operating expenses:
Selling 1,482,965 1,943,227
General and administrative 2,355,300 2,430,036
Restructuring and litigation charges (Note 13) 1,007,897 1,709,358
Bad debts 205,440 103,881
Depreciation (Note 1) 138,060 37,051
------------- -------------
Total operating expenses 5,189,662 6,223,553
------------- -------------
Loss from operations (3,783,977) (2,961,339)
-------------- ------------
Other income (Expense):
Miscellaneous income - 9,093
Interest income 6,235 15,794
Interest expense (644,192) (760,291)
Amortization of debenture discount (Note 4) (193,796) -
Foreign currency transaction gain (loss) (10,693) (27,499)
------------- -------------
Total other income (expense) (842,446) (762,903)
------------- -------------
Loss before income taxes (4,626,423) (3,724,242)
Provision for income taxes (Note 6) - 220,568
------------ -----------
Net loss $(4,626,423) $(3,944,810)
=========== ===========
Net loss per share (basic and diluted) (Note 1) $ (1.16) $ (1.00)
============ ===========
Weighted average common shares outstanding 3,985,484 3,930,000
============ ===========
(Note 1)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance (deficit), January 1, 1996 $39,300 $6,315,818 $ (358,064) $5,997,054
Net loss - 1996 - - (3,944,810) (3,944,810)
------------ ----------- ----------- -----------
Balance (deficit), December 31, 1996 39,300 6,315,818 (4,302,874) 2,052,244
Discount on convertible debentures (Note 4) - 800,000 - 800,000
Conversion of convertible debentures
into common shares (Note 4) 2,698 65,802 - 68,500
Net loss - 1997 - - (4,626,423) (4,626,423)
----------- ----------- ----------- -----------
Balance (deficit) December 31, 1997 $41,998 $7,181,620 $(8,929,297) $(1,705,679)
======= ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net Loss $(4,626,423) $ (3,944,810)
Items not requiring cash:
Depreciation and amortization 375,364 240,146
Deferred income taxes - 220,568
Loss on sale or impairment of property and equipment 26,457 193,409
Amortization of debenture discount 193,796 -
Allowance for doubtful accounts (72,376) 279,565
Allowance for inventory obsolescence 49,077 169,000
Changes (increase) decrease in assets and liabilities:
Accounts receivable 1,219,030 (648,346)
Royalties receivable 1,195,803 (481,261)
Inventories 829,704 7,194,202
Prepaid expenses 3,993 57,242
Other assets (14,009) 165,835
Accounts payable and accrued expenses 378,052 (384,224)
Accrued restructuring and litigation (320,439) 651,302
----------- -----------
Net cash (used in) provided by operating (761,971) 3,712,628
activities
Cash Flows from Investing Activities:
Proceeds from the sale of property and equipment 1,250 35,670
Purchase of property and equipment (65,561) (230,437)
Proceeds from sale of temporary investments 137,144 -
Purchase of temporary investments - (18,131)
Refund of security deposits - 14,999
------------- -----------
Net cash provided by (used in) investing 72,833 (197,899)
activities ------------- -----------
</TABLE>
(Continued on next page)
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(Continued from previous page)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Financing Activities:
Checks outstanding in excess of bank balance (7,268) 107,208
Proceeds from long-term debt (1,103,840) -
Net borrowings (repayments) under line-of-credit
agreement (1,038,089) (3,121,767)
Principal payments on long-term debt (706,253) (283,798)
Principal payments on loan from stockholder - (50,028)
Proceeds from issuance of convertible
debentures 1,700,000 -
Increase in deferred finance costs (422,453) -
----------- ----------------
Net cash provided by (used in) financing
activities 629,777 (3,348,385)
------------ ----------------
(Decrease) increase in cash (59,361) 166,344
Cash, beginning of year 170,551 4,207
------------ ----------------
Cash, end of year $ 111,190 $ 170,551
============ ================
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Long-term debt incurred for purchase of $ - $391,603
equipment
Imputed discount on convertible debentures 800,000 -
Conversion of convertible debentures into
common stock 68,500 -
$ 868,500 $ 391,603
Additional cash payment information:
- ------------------------------------
Interest paid $ 767,817 $ 785,223
========== ============
Income taxes $ - $ -
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
- --------------------
The Company's revenues are predominately earned from manufacture and sale of
quality work apparel under a variety of brand names, including Big Smith, Smith
Mountain Classics and Big Smith Vintage. As discussed in Note 13, the
Caterpillar license was purportedly terminated in 1996. The Company extends
unsecured credit principally to national chains and local stores throughout the
United States and certain manufacturers and distributors in Europe. One
unaffiliated customer (Wal-Mart Stores, Inc.), accounted for 45.7% and 30.9% of
the Company's operating revenues for the years ended December 31, 1997 and 1996,
respectively. Accounts receivable for this customer totaled approximately
$1,023,000 and $1,010,000 at December 31, 1997 and 1996, respectively. Sales to
foreign customers accounted for -0-% and 22% of operating revenues for the years
ended December 31, 1997 and 1996, respectively.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Big Smith Global Limited. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory Pricing
- -----------------
All inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
Property and Equipment
- ----------------------
Property and equipment are depreciated over the estimated useful life of each
asset. Annual depreciation is computed using the straight-line method.
Depreciation expense for the years ended December 31, 1997 and 1996 was $271,024
and $205,755, respectively.
F-10
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Intangibles and Deferred Finance Charges
- ----------------------------------------
Trademark acquisition costs are being amortized using the straight-line method
based upon the economic useful life of fifteen years. Deferred finance charges
are recognized using the straight-line method over the term of the related debt,
and are included in interest expense. The Company periodically evaluates the
carrying value of intangible assets to determine whether any impairment has
occurred in the value of such assets. Impairments are recognized when the
present value of projected future cash flows is less than their carrying value.
See Note 7 regarding certain impairment write downs that were recorded during
1997 and 1996.
Earnings Per Share
- ------------------
Earnings per share are computed based on the weighted average number of common
shares outstanding during the year. Stock warrants and options outstanding are
common stock equivalents and are included in the calculation of earnings per
share to the extent they are dilutive using the treasury-stock method. Basic and
diluted earnings per share are the same.
Cash and Cash Equivalents
- -------------------------
The Company considers highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1997 and 1996.
Revenue Recognition
- -------------------
Revenue from sales is recognized when title passes to the customer.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred. The Company incurred approximately
$87,000 and $212,000 in advertising costs during the years ended December 31,
1997 and 1996, respectively.
Income Taxes
- ------------
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax basis of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
F-11
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following:
1997 1996
---- ----
Raw materials $ 760,759 $ 1,239,152
Work-in-process 440,591 364,946
Finished goods 2,064,633 2,540,666
--------- ---------
$ 3,265,983 $ 4,144,764
=========== =========
NOTE 3 - REVOLVING LINE OF CREDIT
1997 1996
---- ----
Revolving line-of-credit $2,595,088 $3,633,177
========== ==========
At December 10, 1997, the Company secured a new revolving loan and credit
accommodation allowing for maximum borrowing of $10,000,000 with borrowing
levels based upon a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks. (See Note 4.) The loan
bears interest at prime rate plus 1.875% (10.375% at December 31, 1997), and
matures in December 2000. At December 31, 1997, the Company has approximately
$259,000 available under this credit accommodation for future use.
The agreement also provides for additional interest under certain circumstances
and other fixed fees payable at closing and annually during the term of the
loan. Some of the proceeds were used to pay off the previous revolving
line-of-credit of $3,633,177 and other equipment loans totaling approximately
$522,000.
The loan is secured by all of the accounts of the Company which includes the
accounts receivable, inventories, property and equipment, and trademarks. The
loan agreement contains a restriction regarding a capital expenditure limit.
F-12
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT
Long-term debt includes the following notes payable:
1997 1996
---- ----
6% convertible debentures due 2000 (a) $1,025,296 $ -
Facility loans (b) 1,103,840 -
Equipment financing and working capital - 164,521
Equipment financing and working capital - 357,439
Trademark note (c) 200,000 300,000
Equipment financing (d) 210,239 269,769
Other 50,720 75,483
---------- ----------
2,590,095 1,167,212
Less: current maturities 429,609 579,991
---------- ----------
Total Long-term debt $2,160,486 $ 587,221
========== ==========
Aggregate annual maturities of long-term debt at December 31, 1997 were:
1998 $ 429,609
1999 424,541
2000 1,735,945
-----------
Total Future Maturities $ 2,590,095
===========
(a) On April 2, 1997, the Company sold convertible debentures in the principal
amount of $1,700,000 to an offshore accredited investor in a private placement.
The debentures bear interest at 6%, mature on March 31, 2000 and are unsecured.
After May 15, 1997, the debentures are convertible into common stock of the
Company at the option of the holder.
The conversion price for each share specified is the lesser of $2.80 or 70% of
the stock's market price on the conversion date if converted between May 16 and
July 10, 1997, and the lesser of $2.80 or 67.5% of the stock's market price on
the conversion date if converted after July 10, 1997. The Company has agreed to
redeem outstanding debentures at 148% of initial principal amount if required to
do so by any applicable law, rule or regulation of any regulatory body,
securities exchange or trading market. The Company paid fees aggregating
$280,000 and issued a warrant to purchase 100,000 shares of the Company's common
stock to the investment banker that arranged the transaction. The warrant
provides for a purchase price of $2.00 per share and expires March 31, 2002.
F-13
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT (Continued)
Because at the time of issuance the debenture holder's conversion rights allowed
a conversion into common shares with a market value in excess of the debenture
principal, this excess at the debenture issuance date of approximately $800,000,
was credited to additional paid-in capital. The resulting discount on the
debentures is charged to operations as imputed interest. At December 31, 1997,
$68,500 of convertible debt has been converted into 269,842 shares of common
stock and the unamortized portion of the discount of $606,204 has been netted
against the principal amount. (See Note 16.)
(b) December 10, 1997, the Company obtained a facility loan in the amount of
$1,103,840 along with a revolving line-of-credit loan (see Note 3). The facility
loan is secured by real estate, equipment and trademarks of the Company. The
loan provides for equal monthly payments over a five year period of time and
bears interest at prime plus 1.875% (10.375% at December 31, 1997)
(c) The trademark note is non-interest bearing, payable in annual installments
of $100,000 and due April 18, 1999.
(d) The equipment loan bears interest at 9.7% and is payable $7,921 per month
including interest, due April 20, 2000 and secured by certain equipment.
NOTE 5 - OPERATING LEASES
The Company leases real property under noncancellable operating leases for
periods of 36 to 60 months. Rent expense for the years ended December 31, 1997
and 1996 was approximately $123,000 and $194,000, respectively.
Future minimum lease payments at December 31, 1997 were:
1998 $ 67,311
1999 40,886
2000 27,258
----------
Total future minimum lease payments $ 135,455
=========
F-14
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes includes these components:
1997 1996
---- ----
Current $ - $ -
Deferred - -
Change in valuation allowance - 220,568
----------- -----------
Total $ - $ 220,568
=========== ===========
A reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below:
1997 1996
---- ----
Computed at the statutory rate (34%) $(1,548,938) $(1,266,242)
Increase (decrease) resulting from:
Non-deductible expenses 19,333 25,117
State income taxes and other, net of federal
tax benefit (163,289) (152,060)
Change in deferred tax asset valuation allowance 1,692,894 1,613,753
---------- -----------
Actual tax provision $ - $ 220,568
============ ==========
The tax effect of temporary differences related to deferred taxes shown on the
balance sheets were:
1997 1996
---- ----
Deferred tax assets:
Allowance for doubtful accounts $98,970 $ 127,196
Inventories 85,050 68,392
Provision for impairment losses on property
and equipment 60,966 60,966
Accrued health insurance 71,757 55,544
Accrued compensated absences - 4,866
Accrued stock option compensation 17,997 17,997
Accrued restructuring/litigation 129,037 187,200
Net operating loss carryforward 2,975,915 1,168,603
Foreign tax credit carryforward - 14,567
----------- ----------
3,439,692 1,705,331
Deferred tax liabilities:
Accumulated depreciation (133,045) (91,578)
----------- -----------
Net deferred tax asset before valuation allowance 3,306,647 1,613,753
----------- -----------
Valuation allowance:
Beginning balance (1,613,753) -
(Increase) decrease during the period (1,692,894) (1,613,753)
----------- ----------
Ending balance (3,306,647) (1,613,753)
----------- ----------
Net deferred tax asset $ - $ -
=========== ==========
F-15
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: INCOME TAXES (CONTINUED)
The above net deferred tax asset is presented on the balance sheets as follow:
1997 1996
---- ----
Deferred tax asset - current $ 402,253 $ 461,195
Deferred tax asset - long-term 2,904,394 1,152,558
Valuation allowance (3,306,647) (1,613,753)
----------- ----------
Net deferred tax asset $ - $ -
============== ==========
The Company has unused operating loss carryforwards of approximately $7,630,000
and $2,996,000 at December 31, 1997 and 1996, respectively, which expire
principally in 2011 and 2012.
NOTE 7 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS
General accepted accounting principles require disclosure of certain significant
estimates and current vulnerabilities due to certain concentrations. Those
matters include the following:
Royalty Receivable and Payable
- ------------------------------
At December 31, 1997 and 1996, the Company has recorded royalties receivable of
$-0- and $1,195,803, respectively, as a current asset and royalties payable of
$665,674 for 1997 and 1996 as a current liability. As discussed in Note 13 the
Company is currently involved in various litigations involving purported
termination of the Caterpillar licensing agreement, including amounts to be
received from licenses for sale of Caterpillar goods manufactured abroad and
royalties to be paid to Caterpillar. Management's position is that there will be
no payment made regarding the amount of recorded royalties payable. Because the
payable is involved in litigation, events could occur in the near term that
would materially affect the amount and timing of payments of this account.
Provision for Inventory Obsolescence and Marketability
- ------------------------------------------------------
At December 31, 1997 and 1996, the Company had quantities of certain fabric,
trim and finished goods that exceeded the current year volume of sales or use.
Management reduced the carrying value of these items by approximately $218,000
and $169,000, through a charge included in the 1997 and 1996 cost of goods sold
and has developed plans for use or disposition of these goods. No estimate can
be made of any additional costs which might result should management's plans be
unsuccessful.
Reduction of Value of Long-Lived Assets
- ---------------------------------------
In connection with the restructuring/litigation described in Note 13, the
Company has reduced the carrying value of certain building improvements and
equipment approximately $156,000 at December 31, 1997 and 1996. The Company
recorded a charge of approximately $228,000 in 1996 to recognize impairment in
the carrying value of certain building improvements and equipment. The amount of
that estimate could vary materially in the near term.
Self Insurance
- --------------
The Company maintains a self-insured health program covering substantially all
of its employees. The Company retains the liability for claim amounts up to
$25,000 annually for each covered employee and has reinsured the liability for
annual claim amounts in excess thereof and $1,000,000 in aggregate with a
commercial insurer. Provisions for claims costs are recorded based upon
management's estimates of the Company's estimates of its aggregate liability for
claims incurred. Claims payments based on actual claims ultimately filed could
differ materially from these estimates.
F-16
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS (Continued)
Litigation - Related Obligations
- --------------------------------
As discussed in Note 13, the Company is a defendant in several lawsuits. The
Company intends to defend against these lawsuits and pursue counterclaims, if
available. The financial statements include estimates of the costs of defense;
they include no accruals of any amounts receivable for counterclaims. The
amounts of ultimate costs related to these lawsuits and amounts which may be
recoverable through counterclaims could differ materially in the near term.
Major Customers
- ---------------
Current vulnerabilities due to concentrations of major customers are discussed
in Note 1.
Revenues from Major Products
- ----------------------------
In 1997 and 1996, approximately $75,000 and $8.3 million of the Company's sales
revenues and substantially all of its royalty revenues pertained to Caterpillar
branded merchandise. Sales of overalls accounted for approximately $7.7 million
and $6.2 million in 1997 and 1996, respectively.
NOTE 8 - LICENSING AGREEMENTS
The Company had entered into licensing agreements with two companies,
Caterpillar, Inc., ("Caterpillar") and Wolverine, to market products under their
respective trademarks. The agreements provided for payments of royalties based
on net sales subject to minimum annual amounts. The Company had received
royalties for the sale abroad of certain Caterpillar goods manufactured abroad.
Royalty expense, including royalties on both foreign and domestic manufactured
goods, for the years ended December 31, 1997 and 1996 was $-0- and $1,425,327,
respectively. Net royalty income after royalty expense for the years ended
December 31, 1997 and 1996 was $-0- and $1,298,217, respectively.
As discussed in Note 13, the Company's license with Caterpillar purportedly has
been terminated. The royalty agreement with Wolverine has been terminated by
mutual agreement.
F-17
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS AND WARRANTS
Special Stock Options
- ---------------------
The Company granted the chief executive officer options to purchase up to 50,000
shares of common stock for 1996, exercisable only if the Company achieved
certain specified levels of net income for the year. The 1996 options were
forfeited because the Company did not achieve the specified net income level.
Stock Option Plan
- -----------------
Under the Company's stock option plan, 500,000 shares of common stock were
reserved for issuance upon exercise of options granted to directors, officers
and employees of the Company. Options issued through December 31, 1997 carry
exercise prices ranging from 27% to 75% of the quoted market price on the date
of the grant. The options vest equally over a period of four years following the
date of grant and the unexercised portion of the options expires and ceases to
be exercisable on the earlier of the fifth year after the date of the grant or
specified date following termination of employment.
In 1996, the Company elected to continue measuring compensation cost using the
intrinsic value based method of accounting prescribed in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees." Compensation cost
recognized for the stock option plan amounted to $40,300 and $22,919 for 1997
and 1996, respectively. Disclosures about the fair value of options and pro
forma disclosures of the effect of measuring compensation based on the fair
value method of accounting have not been presented because management believes
such values do not have a material effect.
Information related to options, other than the special stock options discussed
above, is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price
Options Per Option
------- ----------
<S> <C> <C>
Outstanding at December 31, 1995 (-0- exercisable) 133,000 $3.18
Granted 105,000 2.77
Exercised - -
Forfeited (35,350) 3.18
-----
Outstanding at December 31, 1996 (24,413 exercisable) 202,650 2.77
Granted 110,100 .47
Exercised - -
Forfeited (17,050) 3.18
-------
Outstanding at December 31, 1997 (67,850 exercisable) 295,700 $2.04
======= =====
</TABLE>
F-18
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS AND WARRANTS (continued):
Information related to options outstanding at December 31, 1997:
Exercise price range $0.42 - $4.00
Number of options:
Outstanding 295,700
Exercisable 67,850
Weighted average exercise price:
Outstanding $2.04
Exercisable $3.48
Weighted average remaining contractual life 4 years
As of December 31, 1997 and 1996, the Company has 1,955,000 warrants outstanding
that allows the holder to purchase one share of common stock, par value $.01 per
share until February 8, 1998 at an exercise price of $4.60 per share.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS
The following methods were used to estimate the fair value of financial
instruments:
Cash and Checks Outstanding in Excess of Bank Balance
- -----------------------------------------------------
The carrying amount is a reasonable estimate of fair value.
Temporary Investments
- ---------------------
For these short-term instruments, which consisted of a certificate of deposit in
1996 and other interest-bearing accounts with banks, the carrying amount is a
reasonable estimate of fair value.
Notes Payable and Long-term Debt
- --------------------------------
Fair value is estimated based on the borrowing rates currently available to the
Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash $111,190 $111,190 $170,551 $170,551
Temporary investments 7,761 7,761 144,906 144,906
Financial liabilities:
Checks outstanding in 277,284 277,284 284,552 284,552
excess of bank balance
Line-of-credit 2,595,088 2,595,088 3,633,177 3,663,177
Long-term debt 2,590,095 2,590,095 1,167,212 1,250,452
</TABLE>
F-19
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS
The Company has existing purchase commitments of approximately $2,009,600 for
raw materials with various scheduled delivery dates to June 1998 with net 60 day
terms.
The Company is committed to pay an annual $50,000 facility fee on the revolving
loans and credit accommodations to the bank.
NOTE 12 - RELATED-PARTY TRANSACTIONS
The Company purchases some of its raw materials from a corporation whose
President is the Secretary of the Company. Such purchases for the years ended
December 31, 1997 and 1996, were $224,916 and $90,847, respectively. The Company
also contracted design services of $95,000 in 1997 from a corporation whose
President is the Vice President of Big Smith Sportswear division.
NOTE 13 - LITIGATION AND RESTRUCTURING
Caterpillar Litigation and Other Related Matters
- ------------------------------------------------
The Company is currently engaged in litigation in the United States and in Great
Britain with Caterpillar, Inc., with respect to the Company's rights to continue
to manufacture and sell Caterpillar branded products. The Company believes that
its agreement with Caterpillar licensing it to manufacture and sell such
products has not been properly terminated and it remains licensed to produce
such goods through December 31, 1999, the expiration date of the license.
Caterpillar filed suit seeking declaratory judgment that its purported
termination of the agreement with the Company was proper. On August 19, 1996,
the U.S. District Court ruled that the license had been properly terminated, a
ruling which the Company appealed. On December 6, 1996, the U.S. Supreme Court
of Appeals denied the appeal.
The Company has filed a counterclaim against Caterpillar and other parties. On
December 16, 1997, the court heard oral arguments to dismiss the counterclaim.
To date, the court has not ruled on such motions. The Company expects the case
to move to discovery.
There can be no assurance that the outcome of the litigation will be favorable
to the Company, that the Company's defenses to the claims against it will be
vindicated or that any of its counterclaims will be held to be valid. If the
outcome of the litigation is not favorable, such outcome could have a material
adverse effect on the financial condition of the Company.
The Company is involved in pending or threatened litigation in foreign
jurisdictions with a number of its foreign distributors in connection with their
refusal to pay royalties and account receivable for the sales of goods to such
distributors, which the Company believes to be due in respect of sales by such
distributors of Caterpillar branded products prior to the Company's ceasing to
sell such products. Additionally, certain of these distributors have made claims
against the Company relating to the effects of the purported termination of the
Caterpillar license on their arrangements with the Company.
Although the Company's international attorneys have advised the Company that it
has valid claims in these actions for royalties and accounts receivable owing,
there can be no assurance that the outcome of these litigations or of any of
them will be, on net, favorable to the Company. Additionally, the Company
believes that the outcome of these actions, and particularly with respect to any
claims against it in these actions, may depend, in part on the outcome of the
Caterpillar litigation.
F-20
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LITIGATION AND RESTRUCTURING (continued)
Restructuring
- -------------
In the third quarter of 1996, because of the purported termination of the
Caterpillar licensing agreement and the resulting litigation discussed above,
management decided to cease manufacture, sales of Caterpillar branded products
and refocus efforts on development of the Company's own brands. On August 25,
1996, management adopted a plan to downsize and restructure the Company's
operations. This plan included liquidation of the remaining inventory of
Caterpillar goods, closure of two manufacturing facilities, sale or transfer of
equipment at those facilities, termination or relocation of certain employees
and reorganization of the remaining personnel and business structure. Completion
of the downsizing and restructuring plan occurred in 1997. Provisions were
accrued in 1996 for costs associated with the litigation arising from the
Caterpillar agreement and the subsequent restructuring of the Company.
Provisions with respect to inventory write downs and closeouts were accrued in
cost of goods sold. Operating expenses were accrued for the costs of closing
domestic and foreign facilities and impairment of property and equipment and
other long-lived assets, as well as the costs of litigation and collection of
disputed amounts receivable related to the Caterpillar matters.
Activity in the accrued restructuring/litigation liability account during 1997
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning balance $ 651,302 $ -
Costs and losses originally recognized - 1,397,481
Subsequent adjustments of costs and losses
recognized 1,007,897 311,877
Cash paid and noncash amounts utilized (1,328,336) (1,058,056)
---------- -----------
Ending balance $ 330,863 $ 651,302
========== ===========
</TABLE>
NOTE 14 - MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As discussed in Notes 1, 3 and 11, the Company's liquidity needs could exceed
the amount of borrowings available under the existing agreement. The Company has
commenced several steps to obtain additional sources of liquidity including the
bridge financing arrangements and the sale of additional common stock.
Management believes these actions will provide all of the necessary capital and
cash requirements to ensure the Company's ability to continue to fund the growth
of the workwear division and provide the funds necessary to complete the
introduction of the sportswear line on a global basis.
F-21
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED, NOT REVIEWED BY
INDEPENDENT ACCOUNTANTS)
<TABLE>
<CAPTION>
Provision Earnings
Total Operating (Credit) for (Loss)
Calendar Operating Income Other Income Per
Quarter Revenues (Loss) Expenses Taxes Shares
------- -------- ------ -------- ----- ------
1997
<S> <C> <C> <C> <C>
First $ 1,743,823 $ (491,941) $ 134,151 $ - $(0.16)
Second 2,365,784 (488,872) 247,818 - (0.19)
Third (1) 4,232,496 (603,061) 217,792 - (0.21)
Fourth (1) 4,218,612 (2,200,103) 242,685 - (0.60)
------------ ---------- ------------- ------- -------
$ 12,560,715 $ (3,783,977) $ 842,446(2) $ - $(1.16)
============ ============= ============= =======
1996
First $ 4,537,498 $ (67,127) $ 199,999 $(104,178) $(0.04)
Second 4,903,314 (224,565) 197,923 (164,773) (0.07)
Third(3) 6,541,815 (2,171,329) 181,884 504,087 (0.73)
Fourth(3) 7,120,518 (498,318) 183,097 (14,568) (0.16)
------------ ------------- ------------ ---------- -------
$ 23,103,145 $ (2,961,339) $ 762,903(2) $ 220,568 $(1.00)
============ ============ ============ ========== ========
</TABLE>
(1) Operating (loss) reflects provisions approximately of $650,000 and $358,000
for the fourth and third quarters, respectively, for restructuring and
litigation costs. Also included in fourth quarter operating results are
approximately $304,000 of inventory write downs and accounts payable adjustments
charged to costs of goods sold and additional allowance for doubtful accounts of
approximately $169,000 charged to bad debts expense.
(2) Other expenses are comprised primarily of interest and amortization of the
debenture discount expense in the amounts of $837,987 and $760,291 for 1997 and
1996, respectively.
(3) Operating income (loss) reflects provisions of $311,877 and $1,397,481 for
the fourth and third quarters, respectively, for restructuring and litigation
costs. Also included in third quarter operating results are $814,000 of
inventory write downs charged to costs of goods sold.
NOTE 16 - SUBSEQUENT EVENTS
On February 11, 1998, the Board of Directors granted each non-employee member of
the Board of Directors an option to purchase 10,000 shares of common stock of
the Company.
Also, subject to stockholder approval to the extent the grant exceeds available
shares under the 1994 plan, the President of the Company was granted options to
purchase 1,000,000 shares of the Company's common stock. A senior advisor to the
Company was granted options to purchase 50,000 shares of the Company's common
stock. The option exercise price at the date of grants is equal to the fair
market value of the common stock.
The Company will be opening in May 1998 a new retail store in the South Beach
area of Miami Beach for their new sportswear line. The Company signed a five
year lease calling for monthly payments for the first two years of $2,916 and
nominal increments thereafter.
On March 19, 1998, the bondholders converted the remaining $1,631,500 of the 6%
convertible debentures into 2,900,000 shares of common stock. As a result of
this transaction, the discount of approximately $606,000 at December 31, 1997
will be charged against additional income in 1998. (See Note 4(a).)
F-22
<PAGE>
NOTE 17 - RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 financial statement presentation. These reclassifications
had no effect on reported net loss.
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (as it may be amended, this "AGREEMENT") is
entered into on December ___, 1997 between NATIONSCREDIT COMMERCIAL CORPORATION,
THROUGH ITS NATIONSCREDIT COMMERCIAL FUNDING DIVISION ("LENDER"), having an
address at 1177 Avenue of the Americas, 36th Floor, New York, New York 10036 and
BIG SMITH BRANDS, INC. ("BORROWER"), whose chief executive office is located at
7100 West Camino Real, Boca Raton, Florida 33433 ("BORROWER'S ADDRESS"). The
Schedules to this Agreement are an integral part of this Agreement and are
incorporated herein by reference. Terms used, but not defined elsewhere, in this
Agreement are defined in Schedule B.
1. LOANS AND CREDIT ACCOMMODATIONS.
1.1 AMOUNT. Subject to the terms and conditions contained in this Agreement,
Lender will:
(A) REVOLVING LOANS AND CREDIT ACCOMMODATIONS. From time to time
during the Term at Borrower's request, make revolving loans to Borrower
("REVOLVING LOANS"), and make letters of credit, bankers acceptances and other
credit accommodations ("CREDIT ACCOMMODATIONS") available to Borrower, in each
case to the extent that there is sufficient Availability at the time of such
request to cover, dollar for dollar, the requested Revolving Loan or Credit
Accommodation; PROVIDED, that after giving effect to such Revolving Loan or
Credit Accommodation, (x) the outstanding balance of all monetary Obligations
(INCLUDING the principal balance of any Term Loan and, solely for the purpose of
determining compliance with this provision, the Credit Accommodation Balance)
will not exceed the Maximum Facility Amount set forth in Section 1(a) of
Schedule A and (y) none of the other Loan Limits set forth in Section 1 of
Schedule A will be exceeded. For this purpose, "AVAILABILITY" means:
(i) the aggregate amount of Eligible Accounts (less maximum
existing or asserted taxes, discounts, credits and allowances)
multiplied by the Accounts Advance Rate set forth in Section 1(b)(i) of
Schedule A but subject to the Accounts Sublimit set forth in Section
1(c) of Schedule A;
PLUS
(ii) the lower of cost or market value of Eligible Inventory
multiplied by the Inventory Advance Rate(s) set forth in Section
1(b)(ii) of Schedule A, but not to exceed the Inventory Sublimit(s) set
forth in Section 1(d) of Schedule A;
PLUS
(iii) the amount of any additional advances available under
Sections 1(e)(i), (iii) and (iii) of Schedule A, if any;
<PAGE>
MINUS
(iv) all Reserves which Lender has established pursuant to
Section 1.2 (including those to be established in connection with the
requested Revolving Loan or Credit Accommodation);
MINUS
(v) the outstanding balance of all of the monetary
Obligations (EXCLUDING the Credit Accommodation Balance and the
principal balance of the Term Loan); and
PLUS
(vi) the Overadvance Amount, if any, set forth in Section
1(h) of Schedule A.
(B) TERM LOAN. On the date of this Agreement, make (i) an advance to
Borrower computed with respect to the value of Borrower's Eligible Equipment
(the ("EQUIPMENT ADVANCE") in the principal amount, if any, set forth in Section
2(a) of Schedule A, and (ii) an advance to Borrower computed with respect to the
value of Borrower's Eligible Real Property (the "REAL PROPERTY ADVANCE") in the
principal amount, if any, set forth in Section 2(a) of Schedule A. The Equipment
Advance and the Real Property Advance are collectively referred to as the "TERM
LOAN."
1.2 RESERVES. Lender may from time to time establish and revise such
reserves as Lender deems appropriate in its sole discretion ("RESERVES") to
reflect (i) events, conditions, contingencies or risks which affect or may
affect (A) the Collateral or its value, or the security interests and other
rights of Lender in the Collateral or (B) the assets, business or prospects of
Borrower or any Obligor, (ii) Lender's good faith concern that any Collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect, (iii) any fact or circumstance which Lender determines in
good faith constitutes, or could constitute, a Default or Event of Default or
(iv) any other events or circumstances which Lender determines in good faith
make the establishment or revision of a Reserve prudent. Without limiting the
foregoing, Lender shall (x) in the case of each Credit Accommodation issued for
the purchase of Inventory (a) which meets the criteria for Eligible Inventory
set forth in clauses (i), (ii), (iii), (v) and (vi) of the definition of
Eligible Inventory, (b) which is or will be in transit to one of the locations
set forth in Section 9(d) of Schedule A, (c) which is fully insured in a manner
satisfactory to Lender and (d) with respect to which Lender is in possession of
all bills of lading and all other documentation which Lender has requested, all
in form and substance satisfactory to Lender in its sole discretion, establish a
Reserve equal to the cost of such Inventory (plus all duties, freight, taxes,
insurance, costs and other charges and expenses relating to such Credit
Accommodation or such Eligible Inventory) multiplied by a percentage equal to
100% minus
2
<PAGE>
the Inventory Advance Rate applicable to Eligible Inventory and (y) in the case
of any other Credit Accommodation issued for any purpose, establish a Reserve
equal to the full amount of such Credit Accommodation plus all costs and other
charges and expenses relating to such Credit Accommodation. In addition, (x)
Lender shall establish a permanent Reserve in the amount set forth in Section
1(g) of Schedule A, and (y) if the outstanding principal balance of the Term
Loan advance with respect to Eligible Equipment exceeds the percentage set forth
in Section 2(a) of Schedule A of the appraised value of such Eligible Equipment,
Lender may establish an additional Reserve in the amount of such excess (and,
for this purpose, if payments of principal on the Term Loan advances against
Eligible Equipment and Real Property are not calculated separately, payments of
principal of the Term Loan made by Borrower shall be deemed to apply to the Term
Loan advance with respect to Eligible Equipment and Real Property, respectively,
in proportion to the original principal amounts of such advances). Lender may,
in its discretion, establish and revise Reserves by deducting them in
determining Availability or by reclassifying Eligible Accounts or Eligible
Inventory as ineligible. In no event shall the establishment of a Reserve in
respect of a particular actual or contingent liability obligate Lender to make
advances hereunder to pay such liability or otherwise obligate Lender with
respect thereto.
1.3 OTHER PROVISIONS APPLICABLE TO CREDIT ACCOMMODATIONS. Lender may, in its
sole discretion and on terms and conditions acceptable to Lender, make Credit
Accommodations available to Borrower either by issuing them, or by causing other
financial institutions to issue them supported by Lender's guaranty or
indemnification; PROVIDED, that after giving effect to each Credit
Accommodation, the Credit Accommodation Balance will not exceed the Credit
Accommodation Limit set forth in Section 1(f) of Schedule A. Any amounts paid by
Lender in respect of a Credit Accommodation will be treated for all purposes as
a Revolving Loan which shall be secured by the Collateral and bear interest, and
be payable, in the same manner as a Revolving Loan. Borrower agrees to execute
all documentation reasonably required by Lender or the issuer of any Credit
Accommodation in connection with any such Credit Accommodation.
1.4 REPAYMENT. Accrued interest on all monetary Obligations shall be payable
on the first day of each month. Principal of the Term Loan shall be repaid as
set forth in Section 2(b) of Schedule A. If at any time any of the Loan Limits
are exceeded, Borrower will immediately pay to Lender such amounts (or provide
cash collateral to Lender with respect to the Credit Accommodation Balance in
the manner set forth in Section 7.3), as shall cause Borrower to be in full
compliance with all of the Loan Limits. Notwithstanding the foregoing, Lender
may, in its sole discretion, make or permit Revolving Loans, the Term Loan, any
Credit Accommodations or any other monetary Obligations to be in excess of any
of the Loan Limits; PROVIDED, that Borrower shall, upon Lender's demand, pay to
Lender such amounts as shall cause Borrower to be in full compliance with all of
the Loan Limits. All unpaid monetary Obligations shall be payable in full on the
Maturity Date (as defined in Section 7.1) or, if earlier, the date of any early
termination pursuant to Section 7.2.
3
<PAGE>
1.5 MINIMUM BORROWING. Subject to the terms and conditions of this
Agreement, Borrower agrees to (i) borrow sufficient amounts to cause the
outstanding principal balance of the Loans to equal or exceed, at all times
prior to the Maturity Date, the Minimum Loan Amounts set forth in Section 4 of
Schedule A and (ii) maintain Availability sufficient to enable Borrower to do
so. However, Lender shall not be obligated to loan Borrower the Minimum Loan
Amounts other than in accordance with all of the terms and conditions of this
Agreement.
2. INTEREST AND FEES.
2.1 INTEREST. All Loans and other monetary Obligations shall bear interest
at the Interest Rate(s) set forth in Section 3 of Schedule A, except where
expressly set forth to the contrary in this Agreement or another Loan Document;
PROVIDED, that after the occurrence of an Event of Default, all Loans and other
monetary Obligations shall, at Lender's option, bear interest at a rate per
annum equal to two percent (2%) in excess of the rate otherwise applicable
thereto (the "DEFAULT RATE") until paid in full (notwithstanding the entry of
any judgment against Borrower or the exercise of any other right or remedy by
Lender), and all such interest shall be payable on demand. Changes in the
Interest Rate shall be effective as of the date of any change in the Prime Rate.
Notwithstanding anything to the contrary contained in this Agreement, the
aggregate of all amounts deemed to be interest hereunder and charged or
collected by Lender is not intended to exceed the highest rate permissible under
any applicable law, but if it should, such interest shall automatically be
reduced to the extent necessary to comply with applicable law and Lender will
refund to Borrower any such excess interest received by Lender.
2.2 FEES AND WARRANTS. Borrower shall pay Lender the following fees, and
issue Lender the following warrants, which are in addition to all interest and
other sums payable by Borrower to Lender under this Agreement, and are not
refundable:
(A) CLOSING FEE. A closing fee in the amount set forth in Section
6(a) of Schedule A, which shall be deemed to be fully earned as of, and payable
on, the date hereof.
(B) FACILITY FEES. A facility fee for the Initial Term in the amount
set forth in Section 6(b)(i) of Schedule A (which shall be fully earned as of
the date of this Agreement and shall be payable in equal installments due,
respectively, on each anniversary of the date of this Agreement during the
Initial Term, other than the Maturity Date), and a facility fee for each Renewal
Term in the amount set forth in Section 6(b)(ii) of Schedule A (which shall be
fully earned as of the first day of such Renewal Term and shall be payable in
equal installments due, respectively, on the first day of such Renewal Term and
on each anniversary thereof during such Renewal Term, other than the Maturity
Date).
(C) SERVICING FEE. A monthly servicing fee in the amount set forth
in Section 6(c)
4
<PAGE>
of Schedule A, in consideration of Lender's administration and other services
for each month (or part thereof), which shall be fully earned as of, and payable
in advance on, the date of this Agreement and on the first day of each month
thereafter so long as any of the Obligations are outstanding.
(D) UNUSED LINE FEE. An unused line fee at a rate equal to the
percentage per annum set forth in Section 6(d) of Schedule A of the amount by
which the Maximum Facility Amount exceeds the average daily outstanding
principal balance of the Loans and the Credit Accommodation Balance during the
immediately preceding month (or part thereof), which fee shall be payable, in
arrears, on the first day of each month so long as any of the Obligations are
outstanding and on the Maturity Date.
(E) MINIMUM BORROWING FEE. A minimum borrowing fee equal to the
excess, if any, of (i) interest which would have been payable in respect of each
period set forth in Section 6(e)(i) of Schedule A if, at all times during such
period, the principal balance of the Loans was equal to the Minimum Loan Amount
over (ii) the actual interest payable in respect of such period, which fee shall
be fully earned as of the last day of such period and payable on the date set
forth in Section 6(e)(ii) of Schedule A and on the Maturity Date, commencing
with the immediately following period.
(F) SUCCESS FEE. A success fee in the amount set forth in Section
6(f) of Schedule A, which shall be fully earned as of the date of this Agreement
and payable as set forth in Section 6(f) of Schedule A.
(G) WARRANTS. Warrants to acquire the capital stock of Borrower, as
summarized in Section 6(g) of Schedule A and as more fully set forth in a
separate warrant agreement executed by Borrower contemporaneously with this
Agreement.
(H) CREDIT ACCOMMODATION FEES. The fees relating to Credit
Accommodations set forth in Section 6(i) of Schedule A, payable, in arrears, on
the first day of each month so long as any of the Obligations are outstanding
and on the Maturity Date, plus all costs and fees charged by the issuer, payable
as and when such costs and fees are charged.
2.3 COMPUTATION OF INTEREST AND FEES. All interest and fees shall be
calculated daily on the closing balances in the Loan Account based on the actual
number of days elapsed in a year of 360 days. For purposes of calculating
interest and fees, if the outstanding daily principal balance of the Revolving
Loans is a credit balance, such balance shall be deemed to be zero.
2.4 LOAN ACCOUNT; MONTHLY ACCOUNTINGS. Lender shall maintain a loan account
for Borrower reflecting all advances, charges, expenses and payments made
pursuant to this Agreement (the "LOAN ACCOUNT"), and shall provide Borrower with
a monthly accounting reflecting the activity in the Loan Account. Each
accounting shall be deemed correct,
5
<PAGE>
accurate and binding on Borrower and an account stated (except for reverses and
reapplications of payments made and corrections of errors discovered by Lender),
unless Borrower notifies Lender in writing to the contrary within sixty days
after such account is rendered, describing the nature of any alleged errors or
omissions. However, Lender's failure to maintain the Loan Account or to provide
any such accounting shall not affect the legality or binding nature of any of
the Obligations. Interest, fees and other monetary Obligations due and owing
under this Agreement (including fees and other amounts paid by Lender to issuers
of Credit Accommodations) may, in Lender's discretion, be charged to the Loan
Account, and will thereafter be deemed to be Revolving Loans and will bear
interest at the same rate as other Revolving Loans.
3. SECURITY INTEREST.
3.1 To secure the full payment and performance of all of the Obligations,
Borrower hereby grants to Lender a continuing security interest in all of
Borrower's property and interests in property, whether tangible or intangible,
now owned or in existence or hereafter acquired or arising, wherever located,
including Borrower's interest in all of the following, whether or not eligible
for lending purposes: (i) all Accounts, Chattel Paper, Instruments, Documents,
Goods (including Inventory, Equipment, farm products and consumer goods),
Investment Property, General Intangibles, Deposit Accounts and money, (ii) all
proceeds and products of all of the foregoing (including proceeds of any
insurance policies, proceeds of proceeds and claims against third parties for
loss or any destruction of any of the foregoing) and (iii) all books and records
relating to any of the foregoing.
4. ADMINISTRATION.
4.1 LOCK BOXES AND BLOCKED ACCOUNTS. Borrower will, at its expense,
establish (and revise from time to time as Lender may require) collection
procedures acceptable to Lender, in Lender's sole discretion, for the collection
of checks, wire transfers and other proceeds of Accounts ("ACCOUNT PROCEEDS"),
which may include (i) directing all Account Debtors to send all such proceeds
directly to a post office box designated by Lender either in the name of
Borrower (but as to which Lender has exclusive access) or, at Lender's option,
in the name of Lender (a "LOCK BOX") or (ii) depositing all Account Proceeds
received by Borrower into one or more bank accounts maintained in Lender's name
(each, a "BLOCKED ACCOUNT"), under an arrangement acceptable to Lender with a
depository bank acceptable to Lender, pursuant to which all funds deposited into
each Blocked Account are to be transferred to Lender in such manner, and with
such frequency, as Lender shall specify or (iii) a combination of the foregoing.
Borrower agrees to execute, and to cause its depository banks to execute, such
Lock Box and Blocked Account agreements and other documentation as Lender shall
require from time to time in connection with the foregoing.
4.2 REMITTANCE OF PROCEEDS. Except as provided in Section 4.1, all proceeds
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arising from the sale or other disposition of any Collateral shall be delivered,
in kind, by Borrower to Lender in the original form in which received by
Borrower not later than the following Business Day after receipt by Borrower.
Until so delivered to Lender, Borrower shall hold such proceeds separate and
apart from Borrower's other funds and property in an express trust for Lender.
Nothing in this Section 4.2 shall limit the restrictions on disposition of
Collateral set forth elsewhere in this Agreement.
4.3 APPLICATION OF PAYMENTS. Lender may, in its sole discretion, apply,
reverse and re-apply all cash and non-cash proceeds of Collateral or other
payments received with respect to the Obligations, in such order and manner as
Lender shall determine, whether or not the Obligations are due, and whether
before or after the occurrence of a Default or an Event of Default. For purposes
of determining Availability, such amounts will be credited to the Loan Account
and the Collateral balances to which they relate upon Lender's receipt of advice
from Lender's Bank (set forth in Section 11 of Schedule A) that such items have
been credited to Lender's account at Lender's Bank (or upon Lender's deposit
thereof at Lender's Bank in the case of payments received by Lender in kind), in
each case subject to final payment and collection. However, for purposes of
computing interest on the Obligations, such items shall be deemed applied by
Lender two Business Days after Lender's receipt of advice of deposit thereof at
Lender's Bank.
4.4 NOTIFICATION; VERIFICATION. Lender or its designee may, from time to
time, whether or not a Default or Event of Default has occurred: (i) verify
directly with the Account Debtors the validity, amount and other matters
relating to the Accounts and Chattel Paper, by means of mail, telephone or
otherwise, either in the name of Borrower or Lender or such other name as Lender
may choose; (ii) notify Account Debtors that Lender has a security interest in
the Accounts and that payment thereof is to be made directly to Lender; and
(iii) demand, collect or enforce payment of any Accounts and Chattel Paper (but
without any duty to do so).
4.5 POWER OF ATTORNEY. Borrower hereby grants to Lender an irrevocable power
of attorney, coupled with an interest, authorizing and permitting Lender (acting
through any of its officers, employees, attorneys or agents), at any time
(whether or not a Default or Event of Default has occurred and is continuing,
except as expressly provided below), at Lender's option, but without obligation,
with or without notice to Borrower, and at Borrower's expense, to do any or all
of the following, in Borrower's name or otherwise: (i) execute on behalf of
Borrower any documents that Lender may, in its sole discretion, deem advisable
in order to perfect and maintain Lender's security interests in the Collateral,
to exercise a right of Borrower or Lender, or to fully consummate all the
transactions contemplated by this Agreement and the other Loan Documents
(including such financing statements and continuation financing statements, and
amendments thereto, as Lender shall deem necessary or appropriate) and to file
as a financing statement any copy of this Agreement or any financing statement
signed by Borrower; (ii) execute on behalf of
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Borrower any document exercising, transferring or assigning any option to
purchase, sell or otherwise dispose of or lease (as lessor or lessee) any real
or personal property which is part of the Collateral or in which Lender has an
interest; (iii) execute on behalf of Borrower any invoices relating to any
Accounts, any draft against any Account Debtor, any proof of claim in
bankruptcy, any notice of Lien or claim, and any assignment or satisfaction of
mechanic's, materialman's or other Lien; (iv) execute on behalf of Borrower any
notice to any Account Debtor; (v) receive and otherwise take control in any
manner of any cash or non-cash items of payment or proceeds of Collateral; (vi)
endorse Borrower's name on all checks and other forms of remittances received by
Lender; (vii) pay, contest or settle any Lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (viii)
after the occurrence of a Default or Event of Default, grant extensions of time
to pay, compromise claims relating to, and settle Accounts, Chattel Paper and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (ix) pay any sums required on account of
Borrower's taxes or to secure the release of any Liens therefor; (x) pay any
amounts necessary to obtain, or maintain in effect, any of the insurance
described in Section 5.12; (xi) settle and adjust, and give releases of, any
insurance claim that relates to any of the Collateral and obtain payment
therefor; (xii) instruct any third party having custody or control of any
Collateral or books or records belonging to, or relating to, Borrower to give
Lender the same rights of access and other rights with respect thereto as Lender
has under this Agreement; and (xiii) after the occurrence of a Default or Event
of Default, change the address for delivery of Borrower's mail and receive and
open all mail addressed to Borrower. Any and all sums paid, and any and all
costs, expenses, liabilities, obligations and reasonable attorneys' fees
incurred, by Lender with respect to the foregoing shall be added to and become
part of the Obligations, shall be payable on demand, and shall bear interest at
a rate equal to the highest interest rate applicable to any of the Obligations.
Borrower agrees that Lender's rights under the foregoing power of attorney or
any of Lender's other rights under this Agreement or the other Loan Documents
shall not be construed to indicate that Lender is in control of the business,
management or properties of Borrower.
4.6 DISPUTES. Borrower shall promptly notify Lender of all disputes or
claims relating to Accounts and Chattel Paper. Borrower will not, without
Lender's prior written consent, compromise or settle any Account or Chattel
Paper for less than the full amount thereof, grant any extension of time of
payment of any Account or Chattel Paper, release (in whole or in part) any
Account Debtor or other person liable for the payment of any Account or Chattel
Paper or grant any credits, discounts, allowances, deductions, return
authorizations or the like with respect to any Account or Chattel Paper; except
that prior to the occurrence of an Event of Default, Borrower may take any of
such actions in the ordinary course of its business, PROVIDED that Borrower
promptly reports the same to Lender.
4.7 INVOICES. At Lender's request, Borrower will cause all invoices and
statements
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which it sends to Account Debtors or other third parties to be marked, in a
manner satisfactory to Lender, to reflect Lender's security interest therein.
4.8 INVENTORY.
(A) RETURNS. Provided that no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower will promptly determine the reason for
such return and promptly issue a credit memorandum to the Account Debtor in the
appropriate amount (sending a copy to Lender). After the occurrence of an Event
of Default, Borrower will not accept any return without Lender's prior written
consent. Regardless of whether an Event of Default has occurred, Borrower will
(i) hold the returned Inventory in trust for Lender; (ii) segregate all returned
Inventory from all of Borrower's other property; (iii) conspicuously label the
returned Inventory as Lender's property; and (iv) immediately notify Lender of
the return of such Inventory, specifying the reason for such return, the
location and condition of the returned Inventory and, at Lender's request,
deliver such returned Inventory to Lender at an address specified by Lender;
provided that should no Event of Default have occurred and be continuing,
Borrower can sell such Inventory in the ordinary course of its business.
(B) OTHER COVENANTS. Borrower will not, without Lender's prior
written consent, (i) store any Inventory with any warehouseman or other third
party other than as set forth in Section 9(d) of Schedule A or (ii) sell any
Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent
basis. All of the Inventory has been produced only in accordance with the Fair
Labor Standards Act of 1938 and all rules, regulations and orders promulgated
thereunder.
4.9 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
Business Day's notice, prior to the occurrence of a Default or an Event of
Default, and at any time and with or without notice after the occurrence of a
Default or an Event of Default, Lender or its agents shall have the right to
inspect the Collateral, and the right to examine and copy Borrower's books and
records. Lender shall take reasonable steps to keep confidential all information
obtained in any such inspection or examination, but Lender shall have the right
to disclose any such information to its auditors, regulatory agencies, attorneys
and participants, and pursuant to any subpoena or other legal process. Borrower
agrees to give Lender access to any or all of Borrower's premises to enable
Lender to conduct such inspections and examinations. Such inspections and
examinations shall be at Borrower's expense and the charge therefor shall be
$650 per person per day (or such higher amount as shall represent Lender's then
current standard charge), plus reasonable out-of-pocket expenses. Lender may, at
Borrower's expense, use Borrower's personnel, computer and other equipment,
programs, printed output and computer readable media, supplies and premises for
the collection, sale or other disposition of Collateral to the extent Lender, in
its sole discretion, deems appropriate. Borrower hereby irrevocably authorizes
all
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accountants and third parties to disclose and deliver to Lender, at Borrower's
expense, all financial information, books and records, work papers, management
reports and other information in their possession regarding Borrower. Borrower
will not enter into any agreement with any accounting firm, service bureau or
third party to store Borrower's books or records at any location other than the
address set forth in Section 9(e) of Schedule A without first obtaining Lender's
written consent (which consent may be conditioned upon such accounting firm,
service bureau or other third party agreeing to give Lender the same rights with
respect to access to books and records and related rights as Lender has under
this Agreement).
5. REPRESENTATIONS, WARRANTIES AND COVENANTS.
To induce Lender to enter into this Agreement, Borrower represents, warrants
and covenants as follows (it being understood that (i) each such representation
and warranty will be deemed remade as of the date on which each Loan is made and
each Credit Accommodation is provided and shall not be affected by any knowledge
of, or any investigation by, Lender, and (ii) the accuracy of each such
representation, warranty and covenant will be a condition to each Loan and
Credit Accommodation):
5.1 EXISTENCE AND AUTHORITY. Borrower is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
formation. Borrower is qualified and licensed to do business in all
jurisdictions in which any failure to do so would have a material adverse effect
on Borrower. The execution, delivery and performance by Borrower of this
Agreement and all of the other Loan Documents to which Borrower is a party have
been duly and validly authorized, do not violate Borrower's articles or
certificate of incorporation, by-laws or other organizational documents, or any
law or any agreement or instrument or any court order which is binding upon
Borrower or its property, do not constitute grounds for acceleration of any
indebtedness or obligation under any agreement or instrument which is binding
upon Borrower or its property, and do not require the consent of any Person.
This Agreement and such other Loan Documents have been duly executed and
delivered by, and are enforceable against, Borrower, and all other Obligors who
have signed them, in accordance with their respective terms. Sections 9(g) and
9(h) of Schedule A set forth the names and ownership of Borrower's Subsidiaries
as of the date of this Agreement.
5.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct and complete legal name as of the date
hereof. Listed in Sections 9(a), 9(b) and 9(c) of Schedule A are all prior names
of Borrower and all of Borrower's present and prior trade names. Borrower shall
give Lender at least thirty days' prior written notice before changing its name
or doing business under any other name. Borrower has complied with all laws
relating to the conduct of business under a fictitious business name. Borrower
represents and warrants that (i) each trade name does not refer to
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another corporation or other legal entity; (ii) all Accounts invoiced under any
such trade names are owned exclusively by Borrower and are subject to the
security interest of Lender and the other terms of this Agreement and (iii) all
schedules of Accounts, including any sales made or services rendered using any
trade name shall show Borrower's name as assignor.
5.3 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower has good and marketable
title to the Collateral. The Collateral now is and will remain free and clear of
any and all liens, charges, security interests, encumbrances and adverse claims,
except for Permitted Liens. Lender now has, and will continue to have, a
first-priority perfected and enforceable security interest in all of the
Collateral, subject only to the Permitted Liens, and Borrower will at all times
defend Lender and the Collateral against all claims of others. None of the
Collateral which is Equipment is or will be affixed to any real property in such
a manner, or with such intent, as to become a fixture. Except for leases or
subleases as to which Borrower has delivered to Lender a landlord's waiver in
form and substance satisfactory to Lender, Borrower is not a lessee or sublessee
under any real property lease or sublease pursuant to which the lessor or
sublessor may obtain any rights in any of the Collateral, and no such lease or
sublease now prohibits, restrains, impairs or conditions, or will prohibit,
restrain, impair or condition, Borrower's right to remove any Collateral from
the premises. Whenever any Collateral is located upon premises in which any
third party has an interest (whether as owner, mortgagee, beneficiary under a
deed of trust, lien or otherwise), Borrower shall, whenever requested by Lender,
cause each such third party to execute and deliver to Lender, in form and
substance acceptable to Lender, such waivers and subordinations as Lender shall
specify, so as to ensure that Lender's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any lease
of real property where any of the Collateral now or in the future may be
located.
5.4 ACCOUNTS AND CHATTEL PAPER. As of each date reported by Borrower, all
Accounts which Borrower has reported to Lender as being Eligible Accounts comply
in all respects with the criteria for eligibility established by Lender and in
effect at such time. All Accounts and Chattel Paper are genuine and in all
respects what they purport to be, arise out of a completed, bona fide and
unconditional and non-contingent sale and delivery of goods or rendition of
services by Borrower in the ordinary course of its business and in accordance
with the terms and conditions of all purchase orders, contracts or other
documents relating thereto, each Account Debtor thereunder had the capacity to
contract at the time any contract or other document giving rise to such Accounts
and Chattel Paper were executed, and the transactions giving rise to such
Accounts and Chattel Paper comply with all applicable laws and governmental
rules and regulations.
5.5 INVESTMENT PROPERTY. Borrower will take any and all actions required or
requested by Lender, from time to time, to (i) cause Lender to obtain exclusive
control of any Investment Property in a manner acceptable to Lender and (ii)
obtain from any issuers
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of Investment Property and such other Persons as Lender shall specify, for the
benefit of Lender, written confirmation of Lender's exclusive control over such
Investment Property and take such other actions as Lender may request to perfect
Lender's security interest in such Investment Property. For purposes of this
Section 5.5, Lender shall have exclusive control of Investment Property if (A)
such Investment Property consists of certificated securities and Borrower
delivers such certificated securities to Lender (with appropriate endorsements
if such certificated securities are in registered form); (B) such Investment
Property consists of uncertificated securities and either (x) Borrower delivers
such uncertificated securities to Lender or (y) the issuer thereof agrees,
pursuant to documentation in form and substance satisfactory to Lender, that it
will comply with instructions originated by Lender without further consent by
Borrower, and (C) such Investment Property consists of security entitlements and
either (x) Lender becomes the entitlement holder thereof or (y) the appropriate
securities intermediary agrees, pursuant to documentation in form and substance
satisfactory to Lender, that it will comply with entitlement orders originated
by Lender without further consent by Borrower.
5.6 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
Section 9(e) of Schedule A is Borrower's chief executive office and the location
of its books and records. In addition, except as provided in the immediately
following sentence, Borrower has places of business and Collateral located only
at the locations set forth on Sections 9(d) and 9(e) of Schedule A. Borrower
will give Lender at least thirty days' prior written notice before opening any
additional place of business, changing its chief executive office or the
location of its books and records, or moving any of the Collateral to a location
other than Borrower's Address or one of the locations set forth in Sections 9(d)
and 9(e) of Schedule A, and will execute and deliver all financing statements
and other agreements, instruments and documents which Lender shall require as a
result thereof.
5.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
delivered to Lender by or on behalf of Borrower have been prepared in conformity
with GAAP and completely and fairly reflect the financial condition of Borrower,
at the times and for the periods therein stated. Between the last date covered
by any such financial statement provided to Lender and the date hereof (or, with
respect to the remaking of this representation in connection with the making of
any Loan or the providing of any Credit Accommodation, the date such Loan is
made or such Credit Accommodation is provided), there has been no material
adverse change in the financial condition or business of Borrower. Borrower is
solvent and able to pay its debts as they come due, and has sufficient capital
to carry on its business as now conducted and as proposed to be conducted. All
schedules, reports and other information and documentation delivered by Borrower
to Lender with respect to the Collateral are, or will be, when delivered, true,
correct and complete as of the date delivered or the date specified therein.
5.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
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filed all tax returns and reports required by applicable law, has timely paid
all applicable taxes, assessments, deposits and contributions owing by Borrower
and will timely pay all such items in the future as they became due and payable.
Borrower may, however, defer payment of any contested taxes; PROVIDED, that
Borrower (i) in good faith contests Borrower's obligation to pay such taxes by
appropriate proceedings promptly and diligently instituted and conducted; (ii)
notifies Lender in writing of the commencement of, and any material development
in, the proceedings; (iii) posts bonds or takes any other steps required to keep
the contested taxes from becoming a Lien upon any of the Collateral and (iv)
maintains adequate reserves therefor in conformity with GAAP. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay, all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not withdrawn from
participation in, permitted partial or complete termination of, or permitted the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or any other governmental agency.
5.9 COMPLIANCE WITH LAWS. Borrower has complied in all material respects
with all provisions of all applicable laws and regulations, including those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, the payment and withholding of taxes, ERISA
and other employee matters, safety and environmental matters.
5.10 LITIGATION. Section 9(f) of Schedule A discloses all material claims,
proceedings, litigation or investigations pending or (to the best of Borrower's
knowledge) threatened against Borrower. There is no claim, suit, litigation,
proceeding or investigation pending or (to the best of Borrower's knowledge)
threatened by or against or affecting Borrower in any court or before any
governmental agency (or any basis therefor known to Borrower) which may result,
either separately or in the aggregate, in any material adverse change in the
financial condition or business of Borrower, or in any material impairment in
the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Lender in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower.
5.11 USE OF PROCEEDS. All proceeds of all Loans will be used solely for
lawful business purposes.
5.12 INSURANCE. Borrower will at all times carry property, liability and
other insurance, with insurers acceptable to Lender, in such form and amounts,
and with such deductibles and other provisions, as Lender shall require, and
Borrower will provide
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evidence of such insurance to Lender, so that Lender is satisfied that such
insurance is, at all times, in full force and effect. Each property insurance
policy shall name Lender as loss payee and shall contain a lender's loss payable
endorsement in form acceptable to Lender, each liability insurance policy shall
name Lender as an additional insured, and each business interruption insurance
policy shall be collaterally assigned to Lender, all in form and substance
satisfactory to Lender. All policies of insurance shall provide that they may
not be cancelled or changed without at least thirty days' prior written notice
to Lender, shall contain breach of warranty coverage, and shall otherwise be in
form and substance satisfactory to Lender. Upon receipt of the proceeds of any
such insurance, Lender shall apply such proceeds in reduction of the Obligations
as Lender shall determine in its sole discretion. Borrower will promptly deliver
to Lender copies of all reports made to insurance companies.
5.13 FINANCIAL AND COLLATERAL REPORTS. Borrower has kept and will keep
adequate records and books of account with respect to its business activities
and the Collateral in which proper entries are made in accordance with GAAP
reflecting all its financial transactions, and will cause to be prepared and
furnished to Lender the following (all to be prepared in accordance with GAAP,
unless Borrower's certified public accountants concur in any change therein and
such change is disclosed to Lender):
(A) COLLATERAL REPORTS. On or before the fifteenth day of each
month, an aging of Borrower's Accounts, Chattel Paper and notes receivable, and
weekly Inventory reports, all in such form, and together with such additional
certificates, schedules and other information with respect to the Collateral or
the business of Borrower or any Obligor, as Lender shall request; PROVIDED, that
Borrower's failure to execute and deliver the same shall not affect or limit
Lender's security interests and other rights in any of the Accounts, nor shall
Lender's failure to advance or lend against a specific Account affect or limit
Lender's security interest and other rights therein. Together with each such
schedule, Borrower shall furnish Lender with copies (or, at Lender's request,
originals) of all contracts, orders, invoices, and other similar documents, and
all original shipping instructions, delivery receipts, bills of lading, and
other evidence of delivery, for any goods the sale or disposition of which gave
rise to such Accounts, and Borrower warrants the genuineness of all of the
foregoing. In addition, Borrower shall deliver to Lender the originals of all
Instruments, Chattel Paper, security agreements, guaranties and other documents
and property evidencing or securing any Accounts, immediately upon receipt
thereof and in the same form as received, with all necessary endorsements.
Lender may destroy or otherwise dispose of all documents, schedules and other
papers delivered to Lender pursuant to this Agreement (other than originals of
Instruments, Chattel Paper, security agreements, guaranties and other documents
and property evidencing or securing any Accounts) six months after Lender
receives them, unless Borrower requests their return in writing in advance and
arranges for their return to Borrower at Borrower's expense.
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(B) ANNUAL STATEMENTS. Not later than one hundred twenty days after
the close of each fiscal year of Borrower, unqualified (except for a
qualification for a change in accounting principles with which the accountant
concurs) audited financial statements of Borrower as of the end of such year,
certified by a firm of independent certified public accountants of recognized
standing selected by Borrower but acceptable to Lender (with Lender hereby
acknowledging that Baird Kurtz & Dobson is acceptable), together with a copy of
any management letter issued in connection therewith and a letter from such
accountants acknowledging that Lender is relying on such financial statements;
(C) INTERIM STATEMENTS. Not later than twenty days after the end of
each month hereafter, including the last month of Borrower's fiscal year,
unaudited interim financial statements of Borrower and its Subsidiaries as of
the end of such month and of the portion of Borrower's fiscal year then elapsed,
on a consolidated and consolidating basis, certified by the principal financial
officer of Borrower as prepared in accordance with GAAP and fairly presenting
the consolidated financial position and results of operations of Borrower and
its Subsidiaries for such month and period subject only to changes from audit
and year-end adjustments and except that such statements need not contain notes;
(D) PROJECTIONS, ETC. Such business projections, Availability
projections, business plans, budgets and cash flow statements for Borrower and
its Subsidiaries as Lender shall request from time to time;
(E) SHAREHOLDER REPORTS, ETC. Promptly after the sending or filing
thereof, as the case may be, copies of any proxy statements, financial
statements or reports which Borrower has made available to its shareholders and
copies of any regular, periodic and special reports or registration statements
which Borrower files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange;
(F) ERISA REPORTS. Upon request by Lender, copies of any annual
report to be filed pursuant to the requirements of ERISA in connection with each
plan subject thereto; and
(G) OTHER INFORMATION. Such other data and information (financial
and otherwise) as Lender, from time to time, may reasonably request, bearing
upon or related to the Collateral or Borrower's and each of its Subsidiary's
financial condition or results of operations.
5.14 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Lender with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Lender, make available
Borrower and its officers, employees and agents, and Borrower's books and
records, without charge, to the
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extent that Lender may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
5.15 MAINTENANCE OF COLLATERAL, ETC. Borrower will maintain all of its
Equipment in good working condition, ordinary wear and tear excepted, and
Borrower will not use the Collateral for any unlawful purpose. Borrower will
immediately advise Lender in writing of any material loss or damage to the
Collateral and of any investigation, action, suit, proceeding or claim relating
to the Collateral or which may result in an adverse impact upon Borrower's
business, assets or financial condition.
5.16 NOTIFICATION OF CHANGES. Borrower will promptly notify Lender in
writing of any change in its officers or directors, the opening of any new bank
account or other deposit account, or any material adverse change in the business
or financial affairs of Borrower or the existence of any circumstance which
would make any representation or warranty of Borrower untrue in any material
respect or constitute a material breach of any covenant of Borrower.
5.17 FURTHER ASSURANCES. Borrower agrees, at its expense, to take all
actions, and execute or cause to be executed and delivered to Lender all
promissory notes, security agreements, agreements with landlords, mortgagees and
processors and other bailees, subordination and intercreditor agreements and
other agreements, instruments and documents as Lender may request from time to
time, to perfect and maintain Lender's security interests in the Collateral and
to fully effectuate the transactions contemplated by this Agreement.
5.18 NEGATIVE COVENANTS. Except as set forth in Section 13 of Schedule A,
Borrower will not, without Lender's prior written consent, (i) merge or
consolidate with another Person, form any new Subsidiary or acquire any interest
in any Person; (ii) acquire any assets except in the ordinary course of business
and as otherwise permitted by this Agreement and the other Loan Documents; (iii)
enter into any transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral or other assets, except that Borrower may sell finished
goods Inventory in the ordinary course of its business; (v) make any loans to,
or investments in, any Affiliate or other Person in the form of money or other
assets except for loans or advances to employees in the ordinary course of
business not to exceed $10,000 in the aggregate outstanding at any time; (vi)
incur any debt outside the ordinary course of business; (vii) guaranty or
otherwise become liable (except for endorsements of checks in the ordinary
course of business) with respect to the obligations of another party or entity;
(viii) pay or declare any dividends or other distributions on Borrower's stock,
if Borrower is a corporation (except for dividends payable solely in capital
stock of Borrower) or with respect to any equity interests, if Borrower is not a
corporation; (ix) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's capital stock or other equity interests; (x) make
any change in Borrower's capital structure; (xi) dissolve or elect to dissolve;
(xii) pay any principal or interest on any indebtedness
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owing to an Affiliate, (xiii) enter into any transaction with an Affiliate other
than on arms-length terms; or (xiv) agree to do any of the foregoing.
5.19 FINANCIAL COVENANTS.
(A) CAPITAL EXPENDITURES. Borrower will not expend or commit to
expend, directly or indirectly, for capital expenditures (including capital
lease obligations) in excess of the amount set forth in Section 8(a) of Schedule
A as the Capital Expenditure Limitation in any fiscal year.
(B) NET WORTH. Borrower will at all times maintain a net worth of at
least the amount set forth in Section 8(b) of Schedule A.
(C) TANGIBLE NET WORTH. Borrower will at all times maintain a
minimum tangible net worth of at least the amount set forth in Section 8(c) of
Schedule A.
(D) WORKING CAPITAL. Borrower will at all times maintain working
capital of at least the amount set forth in Section 8(d) of Schedule A.
(E) NET LOSSES. Borrower will not permit its cumulative net loss to
exceed the amount set forth in Section 8(e) of Schedule A.
(F) NET INCOME. Borrower will not permit its cumulative net income
to be less than the amount set forth in Section 8(f) of Schedule A.
(G) LEVERAGE. Borrower will not permit the ratio of its total
liabilities to its net worth to exceed, at any time, the ratio set forth in
Section 8(g) of Schedule A.
(H) OTHER FINANCIAL COVENANTS. Borrower will comply with any
additional financial covenants set forth in Section 8(j) of Schedule A.
6. RELEASE AND INDEMNITY.
6.1 RELEASE. Borrower hereby releases Lender and its Affiliates and their
respective directors, officers, employees, attorneys and agents and any other
Person affiliated with or representing Lender (the "RELEASED PARTIES") from any
and all liability arising from acts or omissions under or pursuant to this
Agreement, whether based on errors of judgment or mistake of law or fact, except
for those arising from willful misconduct. However, in no circumstance will any
of the Released Parties be liable for lost profits or other special or
consequential damages. Such release is made on the date hereof and remade upon
each request for a Loan or Credit Accommodation by Borrower. Without limiting
the foregoing:
(a) Lender shall not be liable for (i) any shortage or discrepancy
in, damage to, or loss or destruction of, any goods, the sale or other
disposition of which gave rise to an
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Account; (ii) any error, act, omission, or delay of any kind occurring in the
settlement, failure to settle, collection or failure to collect any Account;
(iii) settling any Account in good faith for less than the full amount thereof;
or (iv) any of Borrower's obligations under any contract or agreement giving
rise to an Account; and
(b) In connection with Credit Accommodations or any underlying
transaction, Lender shall not be responsible for the conformity of any goods to
the documents presented, the validity or genuineness of any documents, delay,
default or fraud by Borrower, shippers and/or any other Person. Borrower agrees
that any action taken by Lender, if taken in good faith, or any action taken by
an issuer of any Credit Accommodation, under or in connection with any Credit
Accommodation, shall be binding on Borrower and shall not create any resulting
liability to Lender. In furtherance thereof, Lender shall have the full right
and authority to clear and resolve any questions of non-compliance of documents,
to give any instructions as to acceptance or rejection of any documents or
goods, to execute for Borrower's account any and all applications for steamship
or airway guaranties, indemnities or delivery orders, to grant any extensions of
the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents, and to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the Credit Accommodations or applications and other documentation pertaining
thereto.
6.2 INDEMNITY. Borrower hereby agrees to indemnify the Released Parties and
hold them harmless from and against any and all claims, debts, liabilities,
demands, obligations, actions, causes of action, penalties, costs and expenses
(including attorneys' fees), of every nature, character and description, which
the Released Parties may sustain or incur based upon or arising out of any of
the transactions contemplated by this Agreement or the other Loan Documents or
any of the Obligations, including any transactions or occurrences relating to
the issuance of any Credit Accommodation, the Collateral relating thereto, any
drafts thereunder and any errors or omissions relating thereto (including any
loss or claim due to any action or inaction taken by the issuer of any Credit
Accommodation) (and for this purpose any charges to Lender by any issuer of
Credit Accommodations shall be conclusive as to their appropriateness and may be
charged to the Loan Account), or any other matter, cause or thing whatsoever
occurred, done, omitted or suffered to be done by Lender relating to Borrower or
the Obligations (except any such amounts sustained or incurred as the result of
the willful misconduct of the Released Parties). Notwithstanding any provision
in this Agreement to the contrary, the indemnity agreement set forth in this
Section shall survive any termination of this Agreement.
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7. TERM.
7.1 MATURITY DATE. Lender's obligation to make Loans and to provide Credit
Accommodations under this Agreement shall initially continue in effect until the
Initial Maturity Date set forth in Section 7 of Schedule A (the "INITIAL TERM");
PROVIDED, that such date shall automatically be extended (the Initial Maturity
Date, as it may be so extended, being referred to as the "MATURITY DATE") for
successive additional terms of three years each (each a "RENEWAL TERM"), unless
one party gives written notice to the other, not less than sixty days prior to
the Maturity Date, that such party elects not to extend the Maturity Date. This
Agreement and the other Loan Documents and Lender's security interests in and
Liens upon the Collateral, and all representations, warranties and covenants of
Borrower contained herein and therein, shall remain in full force and effect
after the Maturity Date until all of the monetary Obligations are indefeasibly
paid in full.
7.2 EARLY TERMINATION. Lender's obligation to make Loans and to provide
Credit Accommodations under this Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective thirty business days after
written notice of termination is given to Lender or (ii) by Lender at any time
after the occurrence and during the continuance of an Event of Default, without
notice, effective immediately; PROVIDED, that if any Affiliate of Borrower is
also a party to a financing arrangement with Lender, no such early termination
shall be effective unless such Affiliate simultaneously terminates its financing
arrangement with Lender. If so terminated under this Section 7.2, Borrower shall
pay to Lender (i) an early termination fee (the "EARLY TERMINATION FEE") in the
amount set forth in Section 6(h) of Schedule A plus (ii) any earned but unpaid
Facility Fee. Such fee shall be due and payable on the effective date of
termination and thereafter shall bear interest at a rate equal to the highest
rate applicable to any of the Obligations. In addition, if Borrower so
terminates and repays the Obligations without having provided Lender with at
least thirty days' prior written notice thereof, an additional amount equal to
thirty days of interest at the applicable Interest Rate(s), based on the average
outstanding amount of the Obligations for the six month period immediately
preceding the date of termination.
7.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay in full all Obligations, whether or not
all or any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if, on the Maturity Date or on any
earlier effective date of termination, there are any outstanding Credit
Accommodations, then on such date Borrower shall provide to Lender cash
collateral in an amount equal to 110% of the Credit Accommodation Balance to
secure all of the Obligations (including estimated attorneys' fees and other
expenses) relating to said Credit Accommodations or such greater percentage or
amount as Lender reasonably deems appropriate, pursuant to a cash pledge
agreement in form and substance satisfactory to Lender.
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7.4 EFFECT OF TERMINATION. No termination shall affect or impair any right
or remedy of Lender or relieve Borrower of any of the Obligations until all of
the monetary Obligations have been indefeasibly paid in full. Upon indefeasible
payment and performance in full of all of the monetary Obligations (and the
provision of cash collateral with respect to any Credit Accommodation Balance as
required by Section 7.3) and termination of this Agreement, Lender shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be reasonably required to terminate Lender's
security interests in the Collateral.
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8. EVENTS OF DEFAULT AND REMEDIES.
8.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "EVENT OF DEFAULT" under this Agreement, and Borrower shall give
Lender immediate written notice thereof: (i) if any warranty, representation,
statement, report or certificate made or delivered to Lender by Borrower or any
of Borrower's officers, employees or agents is untrue or misleading; (ii) if
Borrower fails to pay when due any principal or interest on any Loan or any
other monetary Obligation; (iii) if Borrower breaches any covenant or obligation
contained in this Agreement or any other Loan Document or fails to perform any
other non-monetary Obligation; (iv) if any levy, assessment, attachment,
seizure, lien or encumbrance (other than a Permitted Lien) is made or permitted
to exist on all or any part of the Collateral; (v) if one or more judgments
aggregating in excess of $50,000, or any injunction or attachment, is obtained
against Borrower or any Obligor which remains unstayed for more than ten days or
is enforced; (vi) the occurrence of any default under any financing agreement,
security agreement or other agreement, instrument or document executed and
delivered by (A) Borrower with, or in favor of, any Person other than Lender or
(B) Borrower or any Affiliate of Borrower with, or in favor of, Lender or any
Affiliate of Lender; (vii) the dissolution, death, termination of existence in
good standing, insolvency or business failure or suspension or cessation of
business as usual of Borrower or any Obligor (or of any general partner of
Borrower or any Obligor if it is a partnership) or the appointment of a
receiver, trustee or custodian for all or any part of the property of, or an
assignment for the benefit of creditors by Borrower or any Obligor, or the
commencement of any proceeding by Borrower or any Obligor under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect, or if Borrower makes or sends a notice of a bulk transfer or
calls a meeting of its creditors; (viii) the commencement of any proceeding
against Borrower or any Obligor under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect which is not
dismissed within 5 days following commencement provided that Lender shall not be
required to make any Loans or issue any Credit Accommodations during the
pendency of such proceeding; (ix) the actual or attempted revocation or
termination of, or limitation or denial of liability upon, any guaranty of the
Obligations, or any security document securing the Obligations, by any Obligor;
(x) if Borrower makes any payment on account of any indebtedness or obligation
which has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated such
indebtedness or obligations attempts to limit or terminate its subordination
agreement; (xi) if there is any actual or threatened indictment of Borrower or
any Obligor under any criminal statute or commencement or threatened
commencement of criminal or civil proceedings against Borrower or any Obligor,
pursuant to which the potential penalties or remedies sought or available
include forfeiture of any property of Borrower or such Obligor;
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(xii) if there is any change in the chief executive officer or chief financial
officer of Borrower; (xiii) if an Event of Default occurs under any Loan and
Security Agreement between Lender and an Affiliate of Borrower; or (xiv) if
Lender determines in good faith that the Collateral is insufficient to fully
secure the Obligations or that the prospect of payment of performance of the
Obligations is impaired.
8.2 REMEDIES. Upon the occurrence of any Default, and at any time
thereafter, Lender, at its option, may cease making Loans or otherwise extending
credit to Borrower under this Agreement or any other Loan Document. Upon the
occurrence of any Event of Default, and at any time thereafter, Lender, at its
option, and without notice or demand of any kind (all of which are hereby
expressly waived by Borrower), may do any one or more of the following: (i)
cease making Loans or otherwise extending credit to Borrower under this
Agreement or any other Loan Document; (ii) accelerate and declare all or any
part of the Obligations to be immediately due, payable and performable,
notwithstanding any deferred or installment payments allowed by any instrument
evidencing or relating to any of the Obligations; (iii) take possession of any
or all of the Collateral wherever it may be found, and for that purpose Borrower
hereby authorizes Lender, without judicial process, to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain (or cause a custodian
to remain) on the premises in exclusive control thereof, without charge for so
long as Lender deems it reasonably necessary in order to complete the
enforcement of its rights under this Agreement or any other agreement; PROVIDED,
that if Lender seeks to take possession of any of the Collateral by court
process, Borrower hereby irrevocably waives (A) any bond and any surety or
security relating thereto required by law as an incident to such possession, (B)
any demand for possession prior to the commencement of any suit or action to
recover possession thereof and (C) any requirement that Lender retain possession
of, and not dispose of, any such Collateral until after trial or final judgment;
(iv) require Borrower to assemble any or all of the Collateral and make it
available to Lender at one or more places designated by Lender which are
reasonably convenient to Lender and Borrower, and to remove the Collateral to
such locations as Lender may deem advisable; (v) complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and,
for such purpose and for the purpose of removal, Lender shall have the right to
use Borrower's premises, vehicles and other Equipment and all other property
without charge; (vi) sell, lease or otherwise dispose of any of the Collateral,
in its condition at the time Lender obtains possession of it or after further
manufacturing, processing or repair, at one or more public or private sales, in
lots or in bulk, for cash, exchange or other property, or on credit (a "SALE"),
and to adjourn any such Sale from time to time without notice other than oral
announcement at the time scheduled for Sale (and, in connection therewith, (A)
Lender shall have the right to conduct such Sale on Borrower's premises without
charge, for such times as Lender deems reasonable, on Lender's premises, or
elsewhere, and the Collateral need not be located at the place of Sale; (B)
Lender may directly or through any of its Affiliates
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purchase or lease any of the Collateral at any such public disposition, and if
permissible under applicable law, at any private disposition and (C) any Sale of
Collateral shall not relieve Borrower of any liability Borrower may have if any
Collateral is defective as to title, physical condition or otherwise at the time
of sale); (vii) demand payment of and collect any Accounts, Chattel Paper,
Instruments and General Intangibles included in the Collateral and, in
connection therewith, Borrower irrevocably authorizes Lender to endorse or sign
Borrower's name on all collections, receipts, Instruments and other documents,
to take possession of and open mail addressed to Borrower and remove therefrom
payments made with respect to any item of Collateral or proceeds thereof and, in
Lender's sole discretion, to grant extensions of time to pay, compromise claims
and settle Accounts, General Intangibles and the like for less than face value;
and (viii) demand and receive possession of any of Borrower's federal and state
income tax returns and the books and records utilized in the preparation thereof
or relating thereto. In addition to the foregoing remedies, upon the occurrence
of any Event of Default resulting from a breach of any of the financial
covenants set forth in Section 5.19, Lender may, at its option, upon not less
than ten days' prior notice to Borrower, reduce any or all of the Advance Rates
set forth in Section 1(b) of Schedule A to the extent Lender, in its sole
discretion, deems appropriate. In addition to the rights and remedies set forth
above, Lender shall have all the other rights and remedies accorded a secured
party after default under the UCC and under all other applicable laws, and under
any other Loan Document, and all of such rights and remedies are cumulative and
non-exclusive. Exercise or partial exercise by Lender of one or more of its
rights or remedies shall not be deemed an election or bar Lender from subsequent
exercise or partial exercise of any other rights or remedies. The failure or
delay of Lender to exercise any rights or remedies shall not operate as a waiver
thereof, but all rights and remedies shall continue in full force and effect
until all of the Obligations have been fully paid and performed. If notice of
any sale or other disposition of Collateral is required by law, notice at least
seven days prior to the sale designating the time and place of sale in the case
of a public sale or the time after which any private sale or other disposition
is to be made shall be deemed to be reasonable notice, and Borrower waives any
other notice. If any Collateral is sold or leased by Lender on credit terms or
for future delivery, the Obligations shall not be reduced as a result thereof
until payment is collected by Lender.
8.3 APPLICATION OF PROCEEDS. Subject to any application required by law, all
proceeds realized as the result of any Sale shall be applied by Lender to the
Obligations in such order as Lender shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other persons legally entitled thereto; but
Borrower shall remain liable to Lender for any deficiency. If Lender, in its
sole discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any Sale, Lender shall have the option,
exercisable at any time, in its sole discretion, of either reducing the
Obligations by the principal amount of the purchase price or deferring the
reduction of the Obligations until the actual receipt by Lender of the cash
therefor.
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9. GENERAL PROVISIONS.
9.1 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally, by reputable private delivery
service, by regular first-class mail or certified mail return receipt requested,
addressed to Lender or Borrower at the address shown in the heading to this
Agreement, or by facsimile to the facsimile number shown in Section 9(i) of
Schedule A, or at any other address (or to any other facsimile number)
designated in writing by one party to the other party in the manner prescribed
in this Section 9.1. All notices shall be deemed to have been given when
received or when delivery is refused by the recipient.
9.2 SEVERABILITY. If any provision of this Agreement, or the application
thereof to any party or circumstance, is held to be void or unenforceable by any
court of competent jurisdiction, such defect shall not affect the remainder of
this Agreement, which shall continue in full force and effect.
9.3 INTEGRATION. This Agreement and the other Loan Documents represent the
final, entire and complete agreement between Borrower and Lender and supersede
all prior and contemporaneous negotiations, oral representations and agreements,
all of which are merged and integrated into this Agreement. THERE ARE NO ORAL
UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT
SET FORTH IN THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.
9.4 WAIVERS. The failure of Lender at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
Loan Documents shall not waive or diminish any right of Lender later to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any other Loan Document
shall be deemed to have been waived by any act or knowledge of Lender or its
agents or employees, but only by a specific written waiver signed by an
authorized officer of Lender and delivered to Borrower. Borrower waives demand,
protest, notice of protest and notice of default or dishonor, notice of payment
and nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, Instrument, Account, General Intangible, Document, Chattel
Paper, Investment Property or guaranty at any time held by Lender on which
Borrower is or may in any way be liable, and notice of any action taken by
Lender, unless expressly required by this Agreement, and notice of acceptance
hereof.
9.5 AMENDMENT. The terms and provisions of this Agreement may not be amended
or modified except in a writing executed by Borrower and a duly authorized
officer of Lender.
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9.6 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement and the other Loan Documents.
9.7 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Lender for all
reasonable attorneys' and paralegals' fees (including in-house attorneys and
paralegals employed by Lender) and all filing, recording, search, title
insurance, appraisal, audit, and other costs incurred by Lender, pursuant to, in
connection with, or relating to this Agreement, including all reasonable
attorneys' fees and costs Lender incurs to prepare and negotiate this Agreement
and the other Loan Documents; to obtain legal advice in connection with this
Agreement and the other Loan Documents or Borrower or any Obligor; to administer
this Agreement and the other Loan Documents (including the cost of periodic
financing statement, tax lien and other searches conducted by Lender); to
enforce, or seek to enforce, any of its rights; prosecute actions against, or
defend actions by, Account Debtors; to commence, intervene in, or defend any
action or proceeding; to enforce and protect, or to seek to enforce and protect,
any of its rights and interests in any bankruptcy case of Borrower, including,
without limitation, by initiating and prosecuting any motion for relief from the
automatic stay and by initiating, prosecuting or defending any other contested
matter or adversary proceeding in bankruptcy; to file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; to examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
to protect, obtain possession of, lease, dispose of, or otherwise enforce
Lender's security interests in, the Collateral; and to otherwise represent
Lender in any litigation relating to Borrower. If either Lender or Borrower
files any lawsuit against the other predicated on a breach of this Agreement,
the prevailing party in such action shall be entitled to recover its reasonable
costs and attorneys' fees, including reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order, decree,
award or judgment. All attorneys' fees and costs to which Lender may be entitled
pursuant to this Section shall immediately become part of the Obligations, shall
be due on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations.
9.8 BENEFIT OF AGREEMENT; ASSIGNABILITY. The provisions of this Agreement
shall be binding upon and inure to the benefit of the respective successors,
assigns, heirs, beneficiaries and representatives of Borrower and Lender;
PROVIDED, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Lender, and any prohibited
assignment shall be void. No consent by Lender to any assignment shall release
Borrower from its liability for any of the Obligations. Lender shall have the
right to assign all or any of its rights and obligations under the Loan
Documents, and to sell participating interests therein, to one or more other
Persons, and Borrower agrees to execute all agreements, instruments and
documents requested by Lender in connection with each such assignment and
participation.
9.9 HEADINGS; CONSTRUCTION. Section and subsection headings are used in this
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Agreement only for convenience. Borrower and Lender acknowledge that the
headings may not describe completely the subject matter of the applicable
Sections or subsections, and the headings shall not be used in any manner to
construe, limit, define or interpret any term or provision of this Agreement.
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Lender or Borrower under any rule of construction or
otherwise.
9.10 GOVERNING LAW; CONSENT TO FORUM, ETC. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED, AND SHALL BE DEEMED TO HAVE BEEN MADE, IN
NEW YORK, NEW YORK, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF SUCH STATE. BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE AND
FEDERAL COURTS IN NEW YORK, NEW YORK OR THE STATE IN WHICH ANY OF THE COLLATERAL
IS LOCATED SHALL HAVE NON-EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT, ANY
OTHER LOAN DOCUMENTS OR ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR THE OTHER LOAN DOCUMENTS. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE
TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND
WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. BORROWER ALSO AGREES THAT
ANY CLAIM OR DISPUTE BROUGHT BY BORROWER AGAINST LENDER PURSUANT TO THIS
AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY MATTER ARISING OUT OF THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT EXCLUSIVELY IN THE STATE AND FEDERAL
COURTS OF NEW YORK. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS,
COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT
SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE IN THE MANNER
AND SHALL BE DEEMED RECEIVED AS SET FORTH IN SECTION 9.1 FOR NOTICES, TO THE
EXTENT PERMITTED BY LAW. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO
AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER
OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE THE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
9.11 WAIVER OF JURY TRIAL, ETC. BORROWER WAIVES (i) THE RIGHT
TO TRIAL BY JURY (WHICH LENDER ALSO WAIVES) IN ANY ACTION, SUIT,
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PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE
LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL OR ANY CONDUCT, ACTS OR
OMISSIONS OF LENDER OR BORROWER OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, ATTORNEYS OR AGENTS OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR
BORROWER, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE; (ii) THE RIGHT TO
INTERPOSE ANY CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND IN ANY
ACTION OR PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO THE LOAN DOCUMENTS OR
ANY MATTER RELATING THERETO, EXCEPT FOR COMPULSORY COUNTERCLAIMS; (iii) NOTICE
PRIOR TO LENDER'S TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR
SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO
EXERCISE ANY OF LENDER'S REMEDIES AND (iv) THE BENEFIT OF ALL VALUATION,
APPRAISEMENT AND EXEMPTION LAWS. BORROWER ACKNOWLEDGES THAT THE FOREGOING
WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND
THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH
BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING
WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
9.12 CONFIDENTIALITY. The Lender agrees that it will use commercially
reasonable efforts to maintain the confidentiality of any information with
respect to the Borrower which is furnished pursuant to this Agreement or any of
the Loan Documents; provided that the Lender may disclose any such information
that (a) has become generally available to the public or has been lawfully
obtained by the Lender from any third party not known by the Lender to be under
any duty of confidentiality to the Borrower; (b) is contained in any documents
filed by Borrower with the Securities and Exchange Commission or documents
mailed by Borrower to its stockholders; (c) may be required or appropriate in
any report, statement or testimony submitted to, or in respect to any inquiry
by, any municipal, state or federal regulatory body having or claiming to have
jurisdiction over the Lender; (d) may be required or appropriate in respect to
any summons or subpoena or in connection with any litigation or in order to
comply with any law, order, regulation or ruling applicable to the Lender; and
(e) as Lender may deem appropriate in its sole and absolute discretion to
endorse its rights under this Agreement and/or any of the Loan Documents.
27
<PAGE>
SCHEDULE A
DESCRIPTION OF CERTAIN TERMS
This Schedule is an integral part of the Loan and Security Agreement between
BIG SMITH BRANDS, INC. and NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS
NATIONSCREDIT COMMERCIAL FUNDING DIVISION (the "AGREEMENT").
1. Loan Limits for Revolving Loans:
(a) Maximum Facility Amount:
$10,000,000
(a) Advance Rates:
(i) Accounts 85%; PROVIDED, that if the Dilution
Advanced Rate: Percentage exceeds 5%, such advance
rate will be reduced by the full
or partial percentage points of
such excess
(i) Inventory
Advance
Rate(s):
(A) Finished goods: 60%
(A) Raw materials: 60%
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(A) Piece 60%; PROVIDED, that the advance
goods, rate for work in process shall
work in automatically reduce by 1% on the
process first day of each month commencing
and trim: January 1, 1998, until it is
reduced to 0
(a) Accounts Sublimit: $500,000 with respect to Dated
Eligible Accounts
(a) Inventory Sublimit(s):
(i) Overall sublimit $4,000,000
on advances
against Eligible
Inventory
(i) Sublimit on $500,000
advances against
piece goods
(i) Sublimit on N/A
advances against
raw materials
(i) Sublimit on $300,000; PROVIDED, that such
advances sublimit will be reduced to
against work in $150,000 during any time when
process Borrower's cumulative losses
(calculated from the date of the
Agreement according to GAAP but
excluding extraordinary losses)
exceed $750,000
(i) Sublimit on $500,000
advances against
trim
A-2
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(i) Sublimit on $250,000
advances against
Inventory in
outlet stores
(a) Additional Advance
Rates
(i) Equipment The lesser of $550,000 and 80% of
Advance Rate: the appraised knockdown value of
Borrower's Eligible Equipment as of
the date of the Agreement, which
advance rate will be reduced to 0 in
60 equal monthly increments on the
first day of each calendar month
commencing with the month following
this Agreement
(i) Real Property The lesser of $275,000 and 60% of
Advance Rate: the appraised quick sale value of
Borrower's Eligible Real Property
as of the date of the Agreement,
which advance rate will be reduced
to 0 in 60 equal monthly increments
on the first day of each calendar
month commencing with the month
following this Agreement
(i) Trademark The lesser of $400,000 and 14% of
Advance Rate: the appraised fair market value of
Borrower's Eligible Trademarks, as
of the date of the Agreement;
PROVIDED, that the sublimit for
Trademark Advances will be reduced
(i) to 0 in 60 equal monthly
increments on the first day of each
calendar month commencing with the
month following the date of this
Agreement and (ii) to $200,000
during any time that Borrower's
cumulative losses (calculated from
the date of the Agreement in
accordance with GAAP but excluding
extraordinary items) exceed
$750,000
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(a) Credit $2,000,000
Accommodation
Limit:
(a) Permanent Reserve Amount: N/A
(a) Overadvance Amount: N/A
2. Loan Limits for Term Loan:
(a) Principal Amount: N/A
(a) Repayment Schedule:
(i) Equipment Advance: N/A
(i) Real Property Advance: N/A
2. Interest Rates:
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<PAGE>
(a) Revolving Loans of 1.875% per annum in excess of the
$5,000,000 or less: Prime Rate
(a) Revolving Loans of 1.875% per annum in excess of the
more than Prime Rate for the first $5,000,000
$5,000,000: outstanding and 1.25% per annum in
excess of the Prime Rate for the
amount outstanding in excess of
$5,000,000
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<PAGE>
2. Minimum Loan Amounts: $2,500,000 average monthly loan
balance $4,000,000 average annual
loan balance
3. Maximum Days:
(a) Maximum days after 120
original INVOICE DATE
for Eligible Accounts:
(a) Maximum days after 60
original INVOICE DUE
DATE for Eligible
Accounts:
2. Fees:
(a) Closing Fee: $75,000, $37,500 of which has
previously been paid
(a) Facility Fee:
(i) Initial Term: $150,000
(i) Renewal Term(s): $150,000
(a) Servicing Fee: N/A
(a) Unused Line Fee: N/A
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<PAGE>
(a) Minimum Borrowing Fee:
(i) Applicable period: Each month with respect to the
average monthly Minimum Loan Amount
and each year with respect to the
average annual Minimum Loan Amount,
respectively, and, in each case, on
the date of any early termination
of the Agreement
(i) Date payable: The first day of each month
commencing with the month after the
date of the Agreement and on each
anniversary of the date of the
Agreement
(a) Success Fee: N/A
(a) Warrants: N/A
(a) Early Termination Fee: 3% of the Maximum Facility Amount
if terminated during the first year
of the Initial Term or any Renewal
Term, 2.50% of the Maximum Facility
Amount if terminated during the
second year of the Initial Term or
any Renewal Term, and 2% of the
Maximum Facility Amount if
terminated thereafter and prior to
the Maturity Date
(a) Fees for letters of credit 1.50% per annum of the face amount
and other Credit of each open Credit Accommodation
Accommodations (or
guaranties thereof by
Lender):
2. Initial Maturity Date: December __, 2000
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<PAGE>
3. Financial Covenants:
(a) Capital Expenditure Limitation: $200,000 during the first year of
the term of the Agreement
$100,000 during each year
thereafter
(a) Minimum Net Worth Requirement: N/A
(a) Minimum Tangible N/A
Net Worth:
(a) Minimum Working Capital: N/A
(a) Maximum N/A
Cumulative Net Loss:
(a) Minimum Cumulative N/A
Net Income:
(a) Maximum Leverage Ratio: N/A
(a) Limitation on N/A
Purchase Money
Security Interests:
(a) Limitation on N/A
Equipment Leases:
(a) Additional Financial Covenants: N/A
2. Borrower Information:
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<PAGE>
(a) Prior Names of Borrower: Gemini Marketing Associates, Inc.
(a) Prior Trade Names of N/A
Borrower:
(a) Existing Trade Names Big Smith Brands, Inc., Big Smith,
of Borrower: Big Smith Mountain Classics, Big
Smith Vintage, Big Smith Kids
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<PAGE>
(a) Inventory Locations: Garnett Outlet Store (Outlet Store)
210 East 4th Street
Garnett, Kansas 66032
Made in America, Inc. (f/k/a Dallas
Manufacturing) (Processor)
P.O. Box 2306
Selma, Alabama 36702-2306
Century Manufacturing, Inc. (Processor)
1705 National Blvd.
Midwest City, Oklahoma 73140
Paramount Headwear, Inc. (Processor)
#1 Paramount Drive
Bourbon, Missouri 65441
Blue Hand, Inc. (Processor)
5650 S. Sinclair Road
Columbia, Missouri 65203
The Lambert Company (Processor)
P.O. Box 740
Chillicothe, Missouri 64601
Pioneer Textile Treatments, Inc.
(Processor)
1422 North Utica Avenue
Tulsa, Oklahoma 74110
USA Products, Inc. (Processor)
9750 Alden
Lenexa, KS 66215
Miami Plant (BSB) (Warehouse)
2211 N. Main Street
Miami, Oklahoma 74355
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<PAGE>
(a) Miami Warehouse (BSB) (Warehouse)
1500 Newman Road
Miami, Oklahoma 74354
Miami Outlet Store (Outlet Store)
14 North Main Street
Miami, Oklahoma 74354
Monettt Outlet Store (Outlet Store)
312 E. Broadway
Monett, Missouri 65708
Big Smith Brands, Inc. (Warehouse, retail,
manufacturing, distribution center)
510 Grant Street
Carthage, Missouri 64836
(a) Other Locations: Big Smith Brands, Inc. (Administrative
Office)
510 Grant Street
Carthage, MO 64836
(a) Litigation: See attached
(a) Ownership of Borrower: N/A
(a) Subsidiaries (and Big Smith Global, Ltd. (100%)
ownership thereof):
(a) Facsimile Numbers:
Borrower: (561)-367-8986
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<PAGE>
Lender: (212) 597-1666
2. Description of Real Property: See attached
3. Lender's Bank: The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
4. Other Covenants: None
5. Exceptions to Negative Covenants: None
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule A as of
the date set forth in the heading to the Agreement.
BORROWER: LENDER:
BIG SMITH BRANDS, INC. NATIONSCREDIT COMMERCIAL CORPORATION,
THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION
By...................................
Its Authorized Signatory
By...................................
Its.............................
A-14
<PAGE>
SCHEDULE B
DEFINITIONS
This Schedule is an integral part of the Loan and Security Agreement
between BIG SMITH BRANDS, INC. and NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH
ITS NATIONSCREDIT COMMERCIAL FUNDING DIVISION (the "AGREEMENT").
As used in the Agreement, the following terms have the following meanings:
"ACCOUNT" means any right to payment for Goods sold or leased or for
services rendered which is not evidenced by an Instrument or Chattel Paper,
whether or not it has been earned by performance.
"ACCOUNT DEBTOR" means the obligor on an Account or Chattel Paper.
"ACCOUNT PROCEEDS" has the meaning set forth in Section 4.1.
"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, member, manager, director, officer, or employee of such Person, any
parent or subsidiary of such Person, or any Person controlling, controlled by or
under common control with such Person or any other Person affiliated, directly
or indirectly, by virtue of family membership, ownership, management or
otherwise.
"AGREEMENT" and "THIS AGREEMENT" mean the Loan and Security Agreement
of which this Schedule B is a part and the Schedules thereto.
"AVAILABILITY" has the meaning set forth in Section 1.1(a)
"BANKRUPTCY CODE" means the United States Bankruptcy Code (11 U.S.C.ss.
101 et seq.).
"BLOCKED ACCOUNT" has the meaning set forth in Section 4.1.
"BORROWER" has the meaning set forth in the heading to the Agreement.
"BORROWER'S ADDRESS" has the meaning set forth in the heading to the
Agreement.
"BUSINESS DAY" means a day other than a Saturday or Sunday or any other
day on which Lender or banks in New York are authorized to close.
"CHATTEL PAPER" has the meaning set forth in the UCC.
"COLLATERAL" means all property and interests in property in or upon
which a security interest or other Lien is granted pursuant to this Agreement or
the other Loan Documents.
B-1
<PAGE>
"CREDIT ACCOMMODATION" has the meaning set forth in Section 1.1(a).
"CREDIT ACCOMMODATION BALANCE" means the sum of (i) the aggregate
undrawn face amount of all outstanding Credit Accommodations and (ii) all
interest, fees and costs due or, in Lender's estimation, likely to become due in
connection therewith.
"DATED ELIGIBLE ACCOUNT" means an Account that meets the criteria of an
Eligible Account except for subclause (ii) but which is due more than 60 days
from invoice date but is not past due more than 30 days from due date or 210
days from invoice date.
"DEFAULT" means any event which with notice or passage of time, or
both, would constitute an Event of Default.
"DEFAULT RATE" has the meaning set forth in Section 2.1.
"DEPOSIT ACCOUNT" has the meaning set forth in the UCC.
"DILUTION PERCENTAGE" means the gross amount of all returns,
allowances, discounts, credits, write-offs and similar items relating to
Borrower's Accounts computed as a percentage of Borrower's gross sales,
calculated on a ninety (90) day rolling average.
"DOCUMENT" has the meaning set forth in the UCC.
"EARLY TERMINATION FEE" has the meaning set forth in Section 7.2.
"ELIGIBLE ACCOUNT" means, at any time of determination, an Account
which satisfies the general criteria set forth below and which is otherwise
acceptable to Lender (PROVIDED, that Lender may, in its sole discretion, change
the general criteria for acceptability of Eligible Accounts upon at least
fifteen days' prior notice to Borrower). An Account shall be deemed to meet the
current general criteria if (i) neither the Account Debtor nor any of its
Affiliates is an Affiliate, creditor or supplier of Borrower; (ii) it does not
remain unpaid more than the earlier to occur of (A) the number of days after the
original INVOICE DATE set forth in Section 5(a) of Schedule A or (B) the number
of days after the original INVOICE DUE DATE set forth in Section 5(b) of
Schedule A or more than 180 days after the original invoice date; (iii) the
Account Debtor or its Affiliates are not past due on other Accounts owing to
Borrower comprising more than 25% of all of the Accounts owing to Borrower by
such Account Debtor or its Affiliates; (iv) all Accounts owing by any Account
Debtor or its Affiliates (other than Wal-Mart Stores, Inc.) do not represent
more than 20% of all otherwise Eligible Accounts and all Accounts owing by
Wal-Mart Stores, Inc. do not represent more than 30% of all otherwise Eligible
Accounts so long as Wal-Mart Stores, Inc. has acknowledged and is in compliance
with Lender's notification letter to it concerning payment of such Eligible
Accounts directly to Lender (PROVIDED, that Accounts which are deemed to be
ineligible solely by reason of this clause (iv) shall be considered Eligible
Accounts to the extent of the amount thereof which does not exceed 20% or 30%
(as applicable) of all otherwise Eligible Accounts); (v) no covenant,
representation or warranty contained in this
B-2
<PAGE>
Agreement with respect to such Account (including any of the representations set
forth in Section 5.4) has been breached; (vi) the Account is not subject to any
contra relationship, counterclaim, dispute or set-off (PROVIDED, that Accounts
which are deemed to be ineligible solely by reason of this clause (vi) shall be
considered Eligible Accounts to the extent of the amount thereof which is not
affected by such contra relationships, counterclaims, disputes or set-offs);
(vii) the Account Debtor's chief executive office or principal place of business
is located in the United States or Provinces of Canada which have adopted the
Personal Property Security Act or a similar act, unless (A) the sale is fully
backed by a letter of credit, guaranty or acceptance acceptable to Lender in its
sole discretion, and if backed by a letter of credit, such letter of credit has
been issued or confirmed by a bank satisfactory to Lender, is sufficient to
cover such Account, and if required by Lender, the original of such letter of
credit has been delivered to Lender or Lender's agent and the issuer thereof
notified of the assignment of the proceeds of such letter of credit to Lender or
(B) such Account is subject to credit insurance payable to Lender issued by an
insurer and on terms and in an amount acceptable to Lender; (viii) it is
absolutely owing to Borrower and does not arise from a sale on a bill-and-hold,
guarantied sale, sale-or-return, sale-on-approval, consignment, retainage or any
other repurchase or return basis or consist of progress billings; (ix) Lender
shall have verified the Account in a manner satisfactory to Lender; (x) the
Account Debtor is not the United States of America or any state or political
subdivision (or any department, agency or instrumentality thereof), unless
Borrower has complied with the Assignment of Claims Act of 1940 (31 U.S.C.
ss.203 et seq.) or other applicable similar state or local law in a manner
satisfactory to Lender; (xi) it is at all times subject to Lender's duly
perfected, first priority security interest and to no other Lien that is not a
Permitted Lien, and the goods giving rise to such Account (A) were not, at the
time of sale, subject to any Lien except Permitted Liens and (B) have been
delivered to and accepted by the Account Debtor, or the services giving rise to
such Account have been performed by Borrower and accepted by the Account Debtor;
(xii) the Account is not evidenced by Chattel Paper or an Instrument of any kind
and has not been reduced to judgment; (xiii) the Account Debtor's total
indebtedness to Borrower does not exceed the amount of any credit limit
established by Borrower or Lender and the Account Debtor is otherwise deemed to
be creditworthy by Lender (PROVIDED, that Accounts which are deemed to be
ineligible solely by reason of this clause (xiii) shall be considered Eligible
Accounts to the extent the amount of such Accounts does not exceed the lower of
such credit limits); (xiv) there are no facts or circumstances existing, or
which could reasonably be anticipated to occur, which might result in any
adverse change in the Account Debtor's financial condition or impair or delay
the collectibility of all or any portion of such Account; (xv) Lender has been
furnished with all documents and other information pertaining to such Account
which Lender has requested, or which Borrower is obligated to deliver to Lender,
pursuant to this Agreement; (xvi) Borrower has not made an agreement with the
Account Debtor to extend the time of payment thereof beyond the time periods set
forth in clause (ii) above; and (xvii) Borrower has not posted a surety or other
bond in respect of the contract under which such Account arose.
"ELIGIBLE EQUIPMENT" means, at any time of determination, Equipment
owned by
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<PAGE>
Borrower which Lender, in its sole discretion, deems to be eligible for
borrowing purposes.
"ELIGIBLE INVENTORY" means, at any time of determination, Inventory
(other than packaging materials and supplies) which satisfies the general
criteria set forth below and which is otherwise acceptable to Lender (PROVIDED,
that Lender may, in its sole discretion, change the general criteria for
acceptability of Eligible Inventory upon at least fifteen days' prior written
notice to Borrower). Inventory shall be deemed to meet the current general
criteria if (i) it consists of raw materials or finished goods, or
work-in-process; (ii) it is in good, new and saleable condition; (iii) it is not
slow-moving, obsolete, unmerchantable, returned or repossessed (except for
returned or repossessed Inventory that is readily saleable as new product); (iv)
it is not in the possession of a processor, consignee or bailee, or located on
premises leased or subleased to Borrower, or on premises subject to a mortgage
in favor of a Person other than Lender, unless such processor, consignee, bailee
or mortgagee or the lessor or sublessor of such premises, as the case may be,
has executed and delivered all documentation which Lender shall require to
evidence the subordination or other limitation or extinguishment of such
Person's rights with respect to such Inventory and Lender's right to gain access
thereto; (v) it meets all standards imposed by any governmental agency or
authority; (vi) it conforms in all respects to any covenants, warranties and
representations set forth in the Agreement; (vii) it is at all times subject to
Lender's duly perfected, first priority security interest and no other Lien
except a Permitted Lien; and (viii) it is situated at an Inventory Location
listed in Section 9(d) of Schedule A or other location of which Lender has been
notified as required by Section 5.6.
"ELIGIBLE REAL PROPERTY" means, at any time of determination, Real
Property owned by Borrower which Lender, in its sole discretion, deems to be
eligible for borrowing purposes.
"EQUIPMENT" means all Goods which are used or bought for use primarily
in business (including farming or a profession) or by a Person who is a
non-profit organization or governmental subdivision or agency and which are not
Inventory, farm products or consumer goods, including all machinery, molds,
machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dies and jigs, and all attachments,
accessories, accessions, replacements, substitutions, additions or improvements
to, or spare parts for, any of the foregoing.
"EQUIPMENT ADVANCE" has the meaning set forth in Section 1.1(b).
"ERISA" means the Employee Retirement Income Security Act of 1974 and
all rules, regulations and orders promulgated thereunder.
"EVENT OF DEFAULT" has the meaning set forth in Section 8.1.
"GAAP" means generally accepted accounting principles as in effect from
time to time, consistently applied.
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<PAGE>
"GENERAL INTANGIBLES" has the meaning set forth in the UCC, and
includes all books and records pertaining to the Collateral and other business
and financial records in the possession of Borrower or any other Person,
inventions, designs, drawings, blueprints, patents, patent applications,
trademarks, trademark applications (other than "intent to use" applications
until a verified statement of use is filed with respect to such applications)
and the goodwill of the business symbolized thereby, names, trade names, trade
secrets, goodwill, copyrights, registrations, licenses, franchises, customer
lists, security and other deposits, causes of action and other rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, rights to purchase or sell real or personal property, rights as a
licensor or licensee of any kind, royalties, telephone numbers, internet
addresses, proprietary information, purchase orders, and all insurance policies
and claims (including life insurance, key man insurance, credit insurance,
liability insurance, property insurance and other insurance), tax refunds and
claims, letters of credit, banker's acceptances and guaranties, computer
programs, discs, tapes and tape files in the possession of Borrower or any other
Person, claims under guaranties, security interests or other security held by or
granted to Borrower, all rights to indemnification and all other intangible
property of every kind and nature.
"GOODS" means all things which are movable at the time the security
interest attaches or which are fixtures (other than money, Documents,
Instruments, Investment Property, Accounts, Chattel Paper, General Intangibles,
or minerals or the like (including oil and gas) before extraction), including
standing timber which is to be cut and removed under a conveyance or contract
for sale, the unborn young of animals, and growing crops.
"INITIAL TERM" has the meaning set forth in Section 7.1.
"INSTRUMENT" has the meaning set forth in the UCC.
"INVENTORY" means all Goods held for sale or lease or furnished or to
be furnished under contracts of service, including all raw materials, work in
process, finished goods, goods in transit and materials and supplies which are
or might be used or consumed in a business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such Goods,
and all products of the foregoing, and shall include interests in goods
represented by Accounts, returned, reclaimed or repossessed goods and rights as
an unpaid vendor.
"INVESTMENT PROPERTY" shall mean all of Borrower's securities, whether
certificated or uncertificated, securities entitlements, securities accounts,
commodity contracts and commodity accounts.
"LENDER" has the meaning set forth in the heading to the Agreement.
"LIEN" means any interest in property securing an obligation owed to,
or a claim by, a Person other than the owner of the property, whether such
interest is based on common
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<PAGE>
law, statute or contract, including rights of sellers under conditional sales
contracts or title retention agreements and reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrancesaffecting property. For the
purpose of this Agreement, Borrower shall be deemed to be the owner of any
property which it has acquired or holds subject to a conditional sale agreement
or other arrangement pursuant to which title to the property has been retained
by or vested in some other Person for security purposes.
"LOAN ACCOUNT" has the meaning set forth in Section 2.4.
"LOAN DOCUMENTS" means the Agreement and all notes, guaranties,
security agreements, certificates, landlord's agreements, Lock Box and Blocked
Account agreements and all other agreements, documents and instruments now or
hereafter executed or delivered by Borrower or any Obligor in connection with,
or to evidence the transactions contemplated by, this Agreement.
"LOAN LIMITS" means, collectively, the Availability limits and all
other limits on the amount of Loans and Credit Accommodations set forth in this
Agreement.
"LOANS" means, collectively, the Revolving Loans and any Term Loan.
"LOCK BOX" has the meaning set forth in Section 4.1.
"MATURITY DATE" has the meaning set forth in Section 7.1.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Lender, whether evidenced by this Agreement or any
other Loan Document, whether arising from an extension of credit, opening of a
Credit Accommodation, guaranty, indemnification or otherwise (including all
fees, costs and other amounts which may be owing to issuers of Credit
Accommodations and all taxes, duties, freight, insurance, costs and other
expenses, costs or amounts payable in connection with Credit Accommodations or
the underlying goods), whether direct or indirect (including those acquired by
assignment and any participation by Lender in Borrower's indebtedness owing to
others), whether absolute or contingent, whether due or to become due, and
whether arising before or after the commencement of a proceeding under the
Bankruptcy Code or any similar statute, including all interest, charges,
expenses, fees, attorney's fees, expert witness fees, audit fees, letter of
credit fees, Closing Fees, Facility Fees, Servicing Fees, Unused Line Fees,
Minimum Borrowing Fees, Success Fees, amounts owing under Warrants, Credit
Accommodation Fees and any other sums chargeable to Borrower under this
Agreement or under any other Loan Document.
"OBLIGOR" means any guarantor, endorser, acceptor, surety or other
person liable on, or with respect to, the Obligations or who is the owner of any
property which is security for the Obligations, other than Borrower.
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"PERMITTED LIENS" means: (i) purchase money security interests in
specific items of Equipment in an aggregate amount not to exceed the limit set
forth in Section 8(h) of Schedule A; (ii) leases of specific items of Equipment
in an aggregate amount not to exceed the limit set forth in Section 8(i) of
Schedule A; (iii) Liens for taxes not yet due and payable; (iv) additional Liens
which are fully subordinate to the security interests of Lender and are
consented to in writing by Lender; (v) security interests being terminated
concurrently with the execution of this Agreement; (vi) Liens of materialmen,
mechanics, warehousemen or carriers arising in the ordinary course of business
and securing obligations which are not delinquent; (vii) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clause (i) or (ii) above; PROVIDED,
that any extension, renewal or replacement Lien is limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase; (viii) Liens in favor
of customs and revenue authorities which secure payment of customs duties in
connection with the importation of goods; (ix) security deposits posted in
connection with real property leases or subleases and (x) rights of way,
easements and other encumbrances on Real Property that do not materially
adversely effect the present use of the property by the Borrower or its value.
Lender will have the right to require, as a condition to its consent under
clause (iv) above, that the holder of the additional Lien sign an intercreditor
agreement in form and substance satisfactory to Lender, in its sole discretion,
acknowledging that the Lien is subordinate to the security interests of Lender,
and agreeing not to take any action to enforce its subordinate Lien so long as
any Obligations remain outstanding, and that Borrower agree that any uncured
default in any obligation secured by the subordinate Lien shall also constitute
an Event of Default under this Agreement.
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, limited liability company, trust, unincorporated organization,
association, corporation, government or any agency or political division
thereof, or any other entity.
"PRIME RATE" means, at any given time, the prime rate as quoted in The
Wall Street Journal as the base rate on corporate loans posted as of such time
by at least 75% of the nation's 30 largest banks (which rate is not necessarily
the lowest rate offered by such banks).
"REAL PROPERTY" means the real property described in Section 10 of
Schedule A.
"REAL PROPERTY ADVANCE" has the meaning set forth in Section 1.1(b).
"RELEASED PARTIES" has the meaning set forth in Section 6.1.
"RENEWAL TERM" has the meaning set forth in Section 7.1.
"RESERVES" has the meaning set forth in Section 1.2.
"REVOLVING LOANS" has the meaning set forth in Section 1.1(a).
B-7
<PAGE>
"SALE" has the meaning set forth in Section 8.2.
"SUBSIDIARY" means any corporation or other entity of which a Person
owns, directly or indirectly, through one or more intermediaries, more than 50%
of the capital stock or other equity interest at the time of determination.
"TERM" means the period commencing on the date of this Agreement and
ending on the Maturity Date.
"TERM LOAN" has the meaning set forth in Section 1.1(b).
"UCC" means, at any given time, the Uniform Commercial Code as adopted
and in effect at such time in the State of New York.
All accounting terms used in this Agreement, unless otherwise indicated,
shall have the meanings given to such terms in accordance with GAAP. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the UCC, to the extent such terms are defined therein. The
term "INCLUDING," whenever used in this Agreement, shall mean "including but not
limited to." The singular form of any term shall include the plural form, and
vice versa, when the context so requires. References to Sections, subsections
and Schedules are to Sections and subsections of, and Schedules to, this
Agreement. All references to agreements and statutes shall include all
amendments thereto and successor statutes in the case of statutes.
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule B as of
the date set forth in the heading to the Agreement.
BORROWER: LENDER:
BIG SMITH BRANDS, INC. NATIONSCREDIT COMMERCIAL CORPORATION,
THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION
By...................................
Its Authorized Signatory
By.................................
Its...........................
B-8
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement") made as of the 1st day of January, 1998, by and between BIG SMITH
BRANDS, INC., a Delaware corporation (the "Company"), and S. PETER LEBOWITZ
(the "Executive").
W I T N E S S E T H :
WHEREAS, the Executive is expected to continue to make
contributions to the financial strength of the Company;
WHEREAS, the Executive and the Company are parties to an
Employment Agreement dated January 1, 1996 (the "Prior Agreement") and wish to
amend and restate the terms and conditions of the Prior Agreement in their
entirety with the terms and conditions of this Agreement;
WHEREAS, the Company desires to continue to employ the
Executive and the Executive desires to continue such employment on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter contained, the parties hereto hereby agree as follows:
1. Employment; Term. The Company hereby employs the Executive
as Chairman of the Board of Directors, Chief Executive Officer and President of
the Company
<PAGE>
and the Executive agrees to serve the Company in such capacities for the period
commencing as of the date of the Prior Agreement (January 1, 1996) and ending on
December 31, 2003 (the "Extended Term").
2. Termination. Subject to the terms and conditions set forth
herein, the Executive's employment may be terminated by either party hereto upon
thirty (30) days' written notice to the other party hereto. The Company shall
only be entitled to terminate the Executive's employment for cause. The term
"cause" shall mean: (i) the Executive's willful failure or refusal to perform
specific reasonable written directives of the Board of Directors of the Company
(the "Board"), which directives are consistent with the scope and nature of the
Executive's duties and responsibilities under this Agreement, and which failure
or refusal is not remedied by the Executive within thirty (30) days after being
notified, in writing, of such failure by the Board; (ii) the Executive's
conviction of a felony; (iii) any act of dishonesty involving the Company which
results in an unjust gain or enrichment to the Executive at the expense of the
Company; or (iv) any act involving moral turpitude of the Executive which
adversely affects the business of the Company.
3. Duties. The Executive shall be responsible for the
supervision, control and conduct of all the business and affairs of the Company
and shall have such additional duties and any additional responsibilities as are
normally assigned to a Chief Executive Officer, Chairman of the Board and
President or which may from time to time be reasonably designated by the Board;
provided, that in no event shall the scope of his duties and the extent of his
responsibilities be substantially different from the duties and responsibilities
usually associated with those positions in a corporation similar in size and
function to the
- 2 -
<PAGE>
Company. At all times, the Executive shall be subject to the direction of the
Board. During the Extended Term, the Executive shall devote his full business
time and best efforts to the business and affairs of the Company.
4. Compensation. The Company shall pay the Executive a salary
at the rate of three hundred thousand dollars ($300,000.00) per annum during the
first year of the Extended Term. For the remainder of the Extended Term, the
Company shall pay the Executive a salary at a rate equal to the sum of $300,000
plus the Executive's First Year Achievement Bonus (as hereinafter defined) per
annum. Such compensation shall be payable in accordance with the usual payroll
practices of the Company, as compensation to the Executive for the services
rendered by the Executive hereunder, including, but not limited to, all services
rendered by the Executive as an officer or director of the Company and its
subsidiaries. In addition, the Executive shall be entitled to a bonus in respect
of the first year of the Extended Term (the "Executive's First Year Achievement
Bonus") equal to the product obtained by multiplying (x) $200,000 by (y) the
quotient obtained by dividing (i) the Company's pre-tax earnings for its fiscal
year ended December 31, 1996, by (ii) $712,575. During the remainder of the
Extended Term, the Executive shall be entitled to a bonus at the discretion of
the Board.
5. Benefits.
(a) The Company agrees to reimburse the Executive for all
reasonable and necessary travel, business entertainment and other business
expenses incurred by the Executive in connection with the performance of his
duties under this Agreement. Such reimbursement shall be made by the Company on
a timely basis upon submission by the
- 3 -
<PAGE>
Executive of vouchers, in accordance with the Company's standard procedures. All
such reimbursements shall be subject to such reasonable limitations as may from
time to time be prescribed by the Board.
(b) The Executive shall be entitled to participate in any
and all life insurance, medical insurance, group health, disability insurance,
and other benefit plans which are made generally available by the Company to
executives of the Company, including, but not limited to, any stock option plan
established by the Company (to the extent that the Executive qualifies under the
eligibility provisions of such plan or plans). Additionally, the Executive shall
be entitled to receive annual paid vacation and paid holidays made available
pursuant to Company policy to all of the senior executives of the Company.
(c) In the event of the death or disability of the
Executive, the Executive's employment hereunder shall terminate and, in addition
to any amounts then due and owing pursuant to Paragraph 4 hereof (appropriately
pro-rated), the Company shall, for the remainder of the Extended Term, pay to
the Executive or the Executive's personal representative, as the case may be,
the Executive's salary at the date of such death or disability. For the purposes
hereof, the term "disability" shall mean the absence of the Executive, due to
physical or mental illness, on a full-time basis for one hundred twenty (120)
consecutive business days or for shorter periods which aggregate more than four
(4) months during any consecutive twelve (12) month period.
6. Severance.
(a) Upon termination of the Executive's employment (i) by
the Company at any time following a "change in control" (as defined herein), or
(ii) by the
- 4 -
<PAGE>
Executive during the twelve (12) months following a "change in control" (as
hereinafter defined), the Company shall be obligated to provide to the Executive
(or his estate if the Executive shall have died after termination) salary, bonus
and benefits in the amount and kind then in effect (and in the case of bonus,
paid during the most recently completed fiscal year) pursuant to Paragraphs 4
and 5(b) hereof, for three years following his discharge. Payment of such salary
and bonus to the Executive (or his estate) shall be made in a lump sum no later
than thirty (30) days after the date of such Termination; provided, however,
that the aggregate amount of such payments and benefits shall be reduced to the
extent necessary to avoid the treatment of such payments as "parachute payments"
(i) not deductible by the Company under Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), and (ii) subject to the excise tax under
Section 4999 of the Code.
(b) The Company acknowledges and agrees that the Executive
shall be entitled to receive all of the payments provided for herein regardless
of any income which the Executive may receive from other sources after the
termination of his employment with the Company.
(c) Nothing in this Paragraph 6 shall confer upon the
Executive the right to continue in the employ of the Company or any of its
subsidiaries or, subject to the terms hereof, shall affect any right which the
Company may have to terminate the employment of the Executive. No benefit
provided herein is intended or shall be deemed to be granted to the Executive in
lieu of any benefits, rights or privileges to which the Executive may be
entitled while he is an employee of the Company under any retirement, pension,
insurance, hospitalization, stock option, stock purchase, incentive compensation
or other plan
- 5 -
<PAGE>
of the Company which may now be in effect or which may hereafter be adopted, it
being understood that the Executive shall have the same rights and privileges to
participate in such plans as any other executive employee of the Company.
(d) In the event the Executive commences litigation to
enforce his rights under this Paragraph 6 and prevails in such litigation, the
Executive shall be entitled to recover his costs and expenses, including
reasonable attorneys' fees.
(e) For purposes of this Agreement, "change in control"
shall mean the acquisition, directly or indirectly, by any "person" or "group"
of "persons" (as these terms are used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 and the rules thereunder) of beneficial
ownership of securities of the Company or of securities of the Company's
ultimate parent corporation, if any, representing 30% or more of the combined
voting power of the then outstanding securities of such corporation.
7. Notices. All notices relating to this Agreement shall be in
writing and shall be deemed to have been given at the time when delivered
personally or sent in the United States by registered or certified mail, return
receipt requested, in a postpaid envelope, addressed to the other party at the
address set forth below, or to such changed address as the other party may have
fixed by notice; provided, however, that any notice of change of address shall
be effective only upon receipt:
To the Company: Big Smith Brands, Inc.
7100 West Camino Real
Boca Raton, FL 33433
To the Executive: S. Peter Lebowitz
7178 Promenade Drive, Apt. B602
- 6 -
<PAGE>
Boca Raton, Florida 33433
With a Copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attn: Michael S. Nelson, Esq.
8. Assignability, Binding Effect and Survival. This Agreement
shall inure to the benefit of and be binding upon the Company, its successors
and assigns, including without limitation, any corporation which may acquire all
or substantially all of the Company's assets and business or with or into which
the Company may be consolidated or merged, and shall inure to the benefit of and
be binding upon the Executive, his heirs, executors, administrators and legal
representatives; provided, that the obligations of the Executive hereunder may
not be delegated.
9. Complete Understanding; Amendment; Waiver. This Agreement
constitutes the complete understanding between the parties with respect to the
employment of the Executive hereunder, and no statement, representation,
warranty or covenant has been made by either party with respect thereto except
as expressly set forth herein. This Agreement shall not be altered, modified,
amended or terminated except by written instrument signed by each of the parties
hereto. Any waiver of any term or provision hereof, or of the application of any
such term or provision to any circumstances, shall be in writing signed by the
party charged with giving such waiver. Waiver by either party hereto of any
breach hereunder by the other party shall not operate as a waiver of any other
breach, whether similar to or different from the breach waived. No delay on the
part of the Company or the Executive in the exercise of any of their respective
rights or remedies shall operate as a
- 7 -
<PAGE>
waiver thereof, and no single or partial exercise by the Company or the
Executive of any such right or remedy shall preclude other or further exercise
thereof.
10. Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be enforced to the fullest extent permitted by
law.
11. Governing Law. This Agreement shall be governed and
construed in accordance with the internal laws of the State of Delaware without
regard to conflict of laws provisions.
12. Indemnification. The Company shall indemnify the Executive
against judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees actually and necessarily incurred, in any action or
proceeding to which the Executive is made a party by reason of the fact that he
is or was an officer or director of the Company, to the fullest extent permitted
by law, the By-laws of the Company and the Certificate of Incorporation of the
Company, as amended or restated.
13. Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute one agreement binding on
all parties hereto.
- 8 -
<PAGE>
14. Titles and Captions. All paragraph, article or section
titles or captions in this Agreement are for convenience only and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
- 9 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly
executed this Agreement as of the date first above written.
BIG SMITH BRANDS, INC.
By:
---------------------
Name: Terry L. Dober
Title: Vice President
------------------------
S. Peter Lebowitz
- 10 -
D.L. CROMWELL INVESTMENTS, INC.
1200 NORTH FEDERAL HIGHWAY
BOCA RATON, FLORIDA 33432
February 10, 1998
Willora Company Limited
c/o Sheldon Salcman
Soreq Inc.
620 Wilson Avenue, Suite 501
Toronto, Ontario, Canada M3K1Z3
Dear Mr. Salcman:
This will confirm the intent of D.L. Cromwell Investments, Inc.
("Cromwell") to facilitate the conversion and sale by Willora Company Limited
(the "Holders") of securities of Big Smith Brands Inc. (the "Company"). The
Holders currently own approximately 218,000 shares of Common Stock of the
Company and $1,631,500 principal amount of 6% Convertible Debentures (the
"Debentures"). It is contemplated that Cromwell will facilitate the conversion
of the Debentures into 2,900,000 shares of Common Stock and the subsequent
resale of such shares and an additional 200,000 shares of Common Stock held by
the Holders for aggregate gross proceeds of $2,000,000. The Company will also
pay directly to the Holders all interest accrued and unpaid on the Debentures to
the date of conversion.
Our providing investment banking services be subject to the following
general terms, representations, conditions and qualifications:
1. The Holders have acquired the Common Stock and Debentures in reliance on the
exemption from registration provided in Regulation S and have not taken any
action that would restrict a purchaser of Common Stock from the Holders from
reselling such securities.
2. The Holders have full power, right and authority to enter into and perform
this Agreement and upon payment of the purchase price set forth herein, the
purchasers will acquire good title to the Securities, free and clear of any
liens, encumbrances, restrictions on transfer or stop transfer instructions.
3. Cromwell will arrange for the purchase by one or more qualified investors of
the 3,100,000 shares of Common Stock from the Holders for aggregate gross
proceeds of $2,000,000. Cromwell represents and warrants to the Company that (i)
such qualified investors shall include only up to 15 "accredited investors" (as
defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act") or "qualified institutional buyers" (as such term
is defined in Rule 144A under the Securities Act), who are not "U.S.
<PAGE>
Persons " (as such term is defined under Rule 902 of Rule 902 of Regulation S
under the Securities Act), and (ii) any nominee to whom shares of Common Stock
are issued for the account of such holders shall not be a U.S. Person. The
Holders shall deliver the Debentures, properly endorsed for transfer and
executed for conversion, and certificates representing 200,000 shares of Common
Stock, along with a blank stock power, to Bernstein & Wasserman, LLP as escrow
agent (the "Escrow Agent") upon execution of this Agreement, for release against
payment of the $1,950,000 net proceeds (after deducting the commission set forth
in paragraph 6 below) to the Holders.
4. Within 7 days of the execution of this Agreement, Cromwell shall arrange for
a purchaser to deposit $250,000 in immediately available funds with the Escrow
Agent, representing an advance against the purchase price due to the Holders.
The remaining amount shall be delivered to the Escrow Agent no later than twenty
(20) days from the date of this letter. Simultaneously with the delivery of
funds, Cromwell shall deliver to the Company and the Escrow Agent instructions
for the issuance of stock certificates for the purchasers. The Company shall
have the transfer agent promptly prepare such certificates and deliver them to
the Escrow Agent.
5. From time to time, and within two business days of receipt of the funds and
certificates, closings shall occur, by delivery by the Escrow Agent of the
certificates to the purchasers and funds to the Holders. The first $400,000
shall be applied against the purchase price of $400,000 for the 200,000 shares
of Common Stock. The parties may designate the amount to be released in any one
closing. The parties agree that the Escrow Agent has no liability as a result of
any fraudulent or unlawful conduct of any other party and agree to hold the
Escrow Agent harmless.
6. In exchange for acting as agent in the sale of Common Stock on behalf of the
Holders, the Holders shall pay a brokerage commission of 2.5% ($50,000) to
Cromwell. Such funds shall be deducted from the last payment out of the
$2,000,000 placed in escrow and delivered to Cromwell upon the closing.
7. The Company shall waive or modify any provisions of the Debentures or
Offshore Securities Subscription Agreement necessary to effect the transactions
described in this letter.
8. Provided, the transactions set forth in this letter agreement are completed,
for a period of two (2) years from the date of this Agreement, the Holders and
their affiliates shall agree not to effect any transactions in the securities of
the Company without the prior written consent of the Company, not to be
unreasonably withheld or unduly delayed.
8. The Company represents that consummation of the transactions contemplated
herein will not result in a breach of any of the terms, provisions or conditions
of any written agreement to which it is a party.
9. The Company represents that the financial and operational history, its
present condition, financial or otherwise, and its prospects are substantially
as represented to Cromwell in its public filings and the various documents
presented to Cromwell by the Company.
10. If the Company receives at least $25 million from a judgment or settlement
of the
<PAGE>
litigation with Catepillar, the Company agrees that it will promptly pay the
Holder $400,000 in cash and the purchasers an aggregate of $500,000 in cash.
11. The Company and the Holders represent that this letter sets forth all
agreements between such parties and that there is no agreement, whether written
or oral, with respect to the payment of any additional cash, securities or other
consideration by the Company to the Holders or any affiliates of the Holders.
12. Notwithstanding anything to the contrary set forth herein, in the Debentures
or in any other agreement between the Holders and the Company, the Company's
obligation to issue and deliver the shares of its Common Stock upon the
conversion of Debentures as contemplated hereby shall be condition upon its
prior receipt of:
(a) a certificate from any nominee in whose name the shares of Common
Stock are to be issued representing and warranting:
i. such nominee is holding the shares for the accounts of no more
than 15 "accredited investors"or qualified institutional buyers,
who are not U.S. Persons under Regulation S; and
ii. such nominee is not a U.S. Person.
(b) a certificate from the nominee on behalf of the beneficial owners
for whose account the shares are being issued, representing and warranting that:
i. each investor is an accredited investor or qualified
institutional buyer, is not a U.S. Person and has such knowledge
and experience in financial and business matters as to be capable
of evaluating the merits and risks of its prospective investment
in the shares to be issued to it;
ii. each investor has been informed that the shares are highly
speculative and involve a high degree of risk, that the shares
have not been registered under the Securities Act and may not be
sold or otherwise disposed of except pursuant to an effective
registration statement filed under the Securities Act or pursuant
to an exemption from the Act and that the Company is under no
obligation to register the shares under the Securities Act on
behalf of such investor; and
iii. each investor is acquiring the shares not with a view to or for
the sale in connection with any distribution of the shares or
with any present intention of distributing the shares or selling
the shares in any manner not in compliance with applicable
securities.
13. This Agreement is delivered in the State of Florida and shall be construed
and enforced in accordance with and governed by, the laws of the State of
Florida, without giving effect to its conflict of law principles. The parties
hereto hereby agree that any action, proceeding or
<PAGE>
claim against it arising out of or in any way related to this Agreement shall be
brought and enforced in the courts of the State of New York or the United States
of America for the Southern District of NewYork and irrevocably submits to such
exclusive jurisdiction, and hereby irrevocably waives any objection to such
exclusive jurisdiction or inconvenient forum.
Very truly yours,
D.L. CROMWELL INVESTMENTS, INC.
By: /s/ David Davidson
------------------
Name: David Davidson
Title: Chairman and Chief
Executive Officer
WILLORA COMPANY LIMITED
By: /s/ Bernard Miller
------------------
Name: Bernard Miller
Title: President
BIG SMITH BRANDS, INC.
By: /s/ S. Peter Lebowitz
----------------------
Name: S. Peter Lebowitz
Title:President
D.L. CROMWELL INVESTMENTS, INC.
1200 NORTH FEDERAL HIGHWAY
BOCA RATON, FLORIDA 33432
February 10, 1998
S. Peter Lebowitz
President
Big Smith Brands, Inc.
7100 W. Camino Real
Boca Raton, Florida 33433
Dear Peter:
As set forth in the attached letter among Big Smith Brands, Inc. (the
"Company"), Willora Company Limited ("Holders") and D.L. Cromwell Investments
Inc. ("Cromwell"), Cromwell has agreed to assist the Company in the conversion
and subsequent resale by the Holders of 200,000 shares of the Company's Common
Stock and the 2,900,000 shares of Common Stock issuable upon conversion of the
$1,631,500 principal amount of 6% Convertible Debentures (the "Debentures")
currently outstanding.
For a period of two years following the closing date, Cromwell shall
have the first right of refusal to purchase for its account or to sell for the
account of the Company, Peter Leibowitz and trusts for the benefit of Peter
Leibowitz's family members, any securities with respect to which the Company or
such persons may seek a private or public offering of the Company's securities.
The Company and such persons will offer to Cromwell in writing the opportunity
to purchase or sell any such securities on terms not more favorable to the
Company or such persons than they can secure elsewhere. If Cromwell declines to
enter into such a transaction or agree to enter into such a transaction within
30 days, then Cromwell shall have no further claim or right with respect to such
financing proposal. In such case, except for an underwritten offering or
acquisition, the Company shall not enter into a transaction in which it will
issue any of its common stock or securities convertible or exercisable into
common stock where the Common Stock would be freely tradeable within six (6)
months following the rejection of the financing proposal without the prior
written consent of Cromwell, which shall not be unreasonably withheld.
Cromwell agrees that until December 31, 2000, with respect to any
shares of Common Stock over which it has voting power, so long as Peter
Liebowitz is the chief executive officer of the Company, it will grant a voting
proxy to Peter Liebowitz or his designee. In addition, so long as its clients
own any of the shares being placed pursuant to these letters, Cromwell will use
its best efforts to insure that such persons vote such shares as recommended by
the Board of Directors in the Board's exercise of its business judgment and its
fiduciary duties. Cromwell is not required to use such efforts if it would
violate any SEC or NASD rule or regulation.
<PAGE>
In addition, the Company shall indemnify Cromwell, its affiliates and
each entity's officers, directors, agents, employees and controlling persons to
the fullest extent permitted by law from and against any and all losses, claims,
damages, expenses (including reasonable fees, expenses and other charges for
counsel), proceedings or investigations (whether formal or informal) or threats
thereof based upon, relating to or arising out of the engagement and
transactions discussed herein.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to us this letter agreement.
Very truly yours,
D.L. CROMWELL INVESTMENTS, INC.
By: /s/ David Davidson
------------------
Name: David Davidson
Title: Chairman and Chief
Executive Officer
Agreed and accepted:
BIG SMITH BRANDS, INC.
By: /s/ S. Peter Lebowitz
---------------------
Name: Peter Lebowitz
Title: President
/s/ S. Peter Lebowitz
- ---------------------
Peter Lebowitz, individually
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 119
<SECURITIES> 0
<RECEIVABLES> 2,330
<ALLOWANCES> (326)
<INVENTORY> 3,266
<CURRENT-ASSETS> 5,537
<PP&E> 2,542
<DEPRECIATION> (1,362)
<TOTAL-ASSETS> 7,527
<CURRENT-LIABILITIES> 7,072
<BONDS> 2,161
0
0
<COMMON> 42
<OTHER-SE> (1,748)
<TOTAL-LIABILITY-AND-EQUITY> 7,527
<SALES> 12,561
<TOTAL-REVENUES> 12,561
<CGS> 11,155
<TOTAL-COSTS> 4,984
<OTHER-EXPENSES> 198
<LOSS-PROVISION> 205
<INTEREST-EXPENSE> 644
<INCOME-PRETAX> (4,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,626)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
